Prologis, Inc.

Welcome to the Prologis Q3 earnings conference call. My name is Carol, and I'll be your operator for today's call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Also note, this conference is being recorded. I'd now like to turn the call over to Tracy Ward, Senior Vice President of Investor Relations. Tracy, you may begin.

Thanks, Carol, and good morning, everyone. Welcome to our third 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 which Collagis 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 third 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. This morning, we'll hear from Tom Olinger, our CFO, who will cover results, real-time market conditions, and guidance. Hamid Moghadam. Gary Anderson, Chris Caton, Mike Perlis, Ed Neckliff, Jean Riley, and Colleen McEwen are also here with us today. And with that, it's my pleasure to turn the call over to Tom. Tom, will you please begin?

Thanks, Tracy. Good morning, everyone, and thank you for joining our call today. Our third quarter results were strong as the team on the ground executed extremely well in this COVID environment, demonstrated by our operating performance and robust capital deployment activity. Our results, plus continued improvement in market conditions, have upgraded our outlook. Starting with our view of the markets, our proprietary data reveals that operating conditions are meaningfully better than they were 90 days ago, and as a result, our earnings are now ahead of pre-COVID levels. The Fawadj's IBI Activity Index rebounded sharply to more than 59 in September, above our long-term average, and up from 50 in June. Space utilization, which is based solely on data source from our customers, was 84% at quarter end and indicates our properties are returning to near peak capacity. On a size-adjusted basis, lease signings were up 31% in the third quarter and up 4% year-to-date. Customers continue to make decisions faster than ever with lease gestation less than 50 days. Proposals remain at healthy levels, up 3% sequentially and up 12% on a year-to-date basis. This positive momentum has led us to raise our market forecast. For 2020 in the U.S., we now estimate net absorption of 210 million square feet and completions of 295 million square feet, each up approximately 50 million square feet from our prior forecast. Net absorption in the quarter was robust at 65 million square feet, pointing to a very healthy finish to the year. We've also upgraded our year-end vacancy forecast for Europe and Japan to 4.3% and 1.3% respectively. Notably, vacancy in Tokyo reached an all-time low of 50 basis points, and rents are growing as a result. As we look to space size, demand broadened across segments this quarter to include 100,000 square feet and above. Space is under 100,000 square feet in several markets, notably the San Francisco Bay Area, have lagged the other segment sizes in both occupancy and market rank growth. For customer segments, demand is also broadening and diversifying in our portfolio. E-commerce continues to grow, representing 37% of the new leasing in the quarter, well above its historical average of 21%. The dramatic structural shift to online shopping is generating demand in three ways. First, a wide range of omnichannel and pure online retailers are growing. And while Amazon is very active, particularly with build-a-suits, they represented just 13% of our new leasing. Second, 3PLs represented more than a third of new e-commerce leasing in the quarter, a record as customers race to augment their fulfillment networks. And third, many of the parcel carriers are also expanding their networks. Our other segments represented 63% of new leasing in the quarter. The most active segments support essential industries, including food and beverage, health care, and consumer products. Another new emerging structural driver is the need for resilient supply chains and higher inventory levels. Inventory-to-sales has fallen to the lowest levels on record, and many customers are operating with razor-thin inventories. We see signs that restocking process has begun. Moving to our results, we had a strong third quarter with core FFO per share of 90 cents. We outperformed our forecast due to higher NLI strategic capital revenue and termination fees partially offset by slightly higher GNA. Rent change on rollover continues to be strong at 25.9% and led by the U.S. at 30.7%. Rent collections remain ahead of 2019 levels. As of this morning, we've collected over 99% of third quarter rents and over 94% of October rents. In addition, we've received 95% of deferred rents due to date. Bad debt is trending lower than forecast and was 43 basis points of rental revenues in the quarter. This was roughly half of what we had forecasted. Our share of cash same-store and allied growth was 2.2%, despite the impact from lower occupancy and bad debt. This speaks to the underlying strength of our rent change, the primary driver of same-store growth in the quarter and the long term. Looking to the balance sheet, we continue to maintain exceptional financial strength with liquidity and combined leverage capacity between Prologis and our open-ended vehicles totaling more than $13 billion. We also continue to refinance debt opportunistically, setting records in the quarter for the lowest REIT and third lowest U.S. investment grade 10 and 30-year coupons in history. For strategic capital, investor demand is unabated. Our team raised over $800 million of new equity this quarter, and the queues in our open-ended vehicles currently stand at $2.6 billion. Turning to guidance for 2020, our outlook continues to improve given what we see in our proprietary data, our customer dialogue, and lower bad debt. While there may be headwinds until we put COVID behind us, our revised guidance range has taken that into account. Here are the key components of significant guidance changes on an R-share basis. We're narrowing our cash change to an OI range between 2.75% and 3.25%. At the midpoint, this assumes a 25 basis point reduction of bad debt, with a new range between 45 and 55 basis points of gross revenues. Globally, market rents grew in the quarter, and we now expect growth of 2% for the year, approximately 250 basis points ahead of our prior forecasts. After prioritizing occupancy for most of the year, we've resumed pushing rents in a handful of leading markets, including New Jersey, Pennsylvania, Southern California, Dallas, and Northern Europe, as well as a few regional markets. On the other hand, we're still salving for occupancy in Houston, Denver, West China, and Madrid. Our in-place market rent spread now stands at over 12% and represents future incremental organic NY growth potential of approximately $450 million annually. For strategic capital, we expect revenue excluding promotes to range between $380 to $385 million. The revenue growth for our business has been excellent, with a five-year revenue taker excluding promotes of over 16%. The vast majority of this revenue is derived from recurring asset management fees from our perpetual or long-life vehicles. When we look at multiples being ascribed to this business, our view is that they are far too low. For comparison, public asset managers are valued at a multiple of more than 20X on far less sticky AUM with much higher promotes. For development, we expect to start $1.1 billion in the fourth quarter, with the full year ranging between $1.6 and $2 billion, up $800 million from our prior forecast. Build assumes we'll remain elevated and comprise about 45% of the annual volume. In addition, by year end, we expect to restart about $180 million or approximately half of the development projects we suspended in the first quarter. At the midpoint, we're increasing both contributions and dispositions by $350 million. Based on our third quarter valuations and current market activity, pricing for our properties is now pushing well beyond pre-COVID levels. Taking these assumptions into account, we are narrowing our range and increasing our 2020 core FFO midpoint by 4.5 cents to $3.76 to $3.78 per share. This includes 21 cents of net promote income, which is up a penny from our prior guidance. Year-to-date growth of the midpoint excluding promotes is 13.7% while keeping leverage flat. Interestingly, while there's been a lot of noise over the past seven months since the beginning of the pandemic, The net of it is we're ahead of our pre-COVID earnings expectations today. In closing, our performance is a testament to the foundation we've been building for more than a decade. Our three-year earnings figure of 11% has outperformed the other logistics rates by more than 500 basis points annually, despite a greater relative decline in leverage. The work that we've done to create the best-in-class portfolio and balance sheet is clearly paying off. The business is proving to be incredibly resilient and is delivering exceptional growth which we expect to continue. With that, I'll turn it back to the operator for your questions.