Prologis, Inc.

Welcome to the Prologis Q1 Earnings Conference Call. My name is Mariama, 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 session, please press star, then 1 on your telephone. If you would like to withdraw your question, please 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.

Thanks, Mariana, and good morning, everyone. Welcome to our first quarter 2020 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations. 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 first quarter results press release and supplementals do contain financial measures such as FFO and EBITDA that are non-GAAP measures, and in accordance with Reg G, we've provided a reconciliation to those measures. This morning, we'll hear from Gene Riley, our Chief Investment Officer, who will comment on real-time market conditions, and Tom Olinger, our CFO, who will cover results and guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curliss, Ed Neckritz, Colleen McKeown, and Tim Arndt are also here with us today. With that, I'll turn the call over to Gene, and Gene, will you please begin?

Thanks, Tracy. We appreciate everyone joining us today, and we hope you and yours are all well. We're glad to report that our teams are healthy and working productively on a remote basis. Our first quarter was very strong in all parts of the business, and Tom will cover these details. I'm going to focus on what we are seeing right now in our outlook for the year. While we are just 30 to 90 days into the COVID economy, we are seeing short-term effects play out very differently across our customer industry sectors. At this time, roughly 60% of our customers are growing and 40% are shrinking. Next week, Chris Caton will be issuing his fourth COVID white paper, specifically on this topic of customer demand segmentation. At the extreme end of the spectrum, categories like food and beverage and consumer staples have sales up significantly, and conversely, clothing, sporting goods, and and home furnishings are all down sharply. Our customers in contraction are going through a short-term shock. Some will recover fairly quickly. Others face a longer transition to normalcy. And unfortunately, certain businesses will not survive. At the same time, the pandemic has led to significant growth for the industries I mentioned serving the stay-at-home economy. And we continue to experience elevated e-commerce demand, a 40% share of new leasing versus 23% pre-crisis. With the benefit of customer dialogue and applied research, we factored in tailwinds and headwinds to arrive at our revised 2020 earnings guidance. Our portfolio quality, customer composition, and balance sheet strength are mitigating the headwinds In our discipline efforts to dispose of 15 billion of non-strategic assets over the past several years, that is paying dividends today. Turning to the long-term impacts, we believe some of the changes brought on by the pandemic will be durable. COVID is very likely to accelerate a share shift from brick and mortar to e-commerce retail. We also believe the growing importance of safety stock will lead to higher global inventory levels over time. These trends will increase demand for logistics real estate in the long term, but will also have a positive effect on 2020 activity, and we're already seeing this. Chris and his team have updated our forecast for logistics real estate market fundamentals and now expect the following for full year 2020. In the U.S., supply will total 225 million square feet and 18% year-over-year decline. U.S. net absorption will total 100 million square feet, the lowest level since 2010, and a 55% year-over-year decline, driving the vacancy rate up 90 basis points to 5.4%. Europe will have similar reductions in the supply and demand, resulting in a 130 basis point vacancy rate increase to 5.2%. Japan's vacancy rate will increase from a record low of 1.4 to 2.8%. In summary, occupancies in all geographies will decline, but also end the year at very healthy levels historically. Our proprietary leasing data shows that the spike in leasing activities we witnessed in March and talked to you all about a couple of weeks ago has settled down. We are now seeing volumes generally in line with historical trends. Forward-looking data continues to be encouraging. During the last 30 days, we signed 198 leases amounting to 17.5 million square feet. That's up 21% year-over-year. and roughly flat adjusted for portfolio size. Our lease proposal generations are up 21% year-over-year. Lease negotiation gestation periods for new leases have declined by about 14 days year-over-year, and retention was just over 80%, a couple hundred basis points higher than comparable historical periods. After slicing the data in several different ways, we see three clear things at this point. First, essential consumer product sectors are driving the demand. Second, e-commerce is driving demand across industry sectors. And third, our larger customers are faring much better than smaller customers in this environment. Now an update on rent relief requests. Growth has slowed here, and to date we have received requests representing 4.3% of gross annual rent. Of these requests, 70% were not granted, 23% remain under review, and 7% have been granted in the form of rent deferral loans representing 27 basis points of gross annual rent, and an average of about 33% days of rent per customer. As mentioned on our last call, this release is targeted at our smaller customers with legitimate needs stemming from COVID and not for opportunistic requests. We believe the total rent deferral loans granted will eventually amount to about 90 basis points of growth annual rent with these loans scheduled for repayment over the remainder of 2020. Turning to the strategic capital business, our investors remain very positive on the logistics real estate sector. As noted on our last call, the vast majority of redemptions to date were in progress prior to COVID-19, and there appears to be good secondary market interest for some portion of the redemption activity. But to date, we have seen no trades on the secondary market. Next, I'd like to provide some context for the updated capital deployment guidance. Tom will detail in a moment. This guidance assumes virtually no incremental activity in acquisitions, business decisions, speculative development, or contributions. Rather than speculate on future market conditions, we are guiding to volumes that have largely been accomplished already. Most of the volume predicted between now and the year end is build-a-suit activity, where the pipeline remains active with multiple leases signed post-COVID, actually. We continue to work closely with customers and municipalities on 30 ongoing projects in 14 markets. Construction continues on 22 of these projects, with eight having been halted by local authorities. And to date, we have yet to stop a project at the request of a customer. While our current leasing data is holding up very well, and we see extremely encouraging trends with e-commerce leasing, we are planning on a reduced demand environment through the end of 2020. We will have opportunities to serve our customer segments in expansion mode, and we will need to support others not so fortunate. We expect to serve as a reliable alternative for Build-A-Suit customers, take advantage of investment opportunities as they emerge, and manage our strategic capital vehicles prudently and opportunistically in this environment. And with that, I'll turn it over to Tom.