Prologis, Inc.

Welcome to the Prologis Q4 earnings conference call. My name is Amy 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 during this time, you will need to press star then one on your telephone. Please note that this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, please begin.

Thanks, Amy, and good morning, everyone. Welcome to our fourth 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 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. This morning, we'll hear from Tom Olinger, our CFO, who will cover results and real-time market conditions, as well as guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curliss, Dan Letter, Ed Nekritz, Gene Riley, and Colleen McEwen are also here with us today. With that, I'll turn the call over to Tom. Tom, will you please begin?

Tom Olinger Thank you, Tracy. Good morning, everyone, and thank you for joining our call today. I want to begin by acknowledging our team and their great work this past year. In an incredibly challenging year, our accomplishments were significant and possible because of the work we've done over the last 10 years building the best-in-class portfolio that is critical to today's supply chain and centered on our customers. During the year, we closed on $17 billion of M&A, further fortified our balance sheet with lower rates and longer maturities, generated over $1.1 billion in free cash flow after dividends, and importantly, continue to deliver sector-leading earnings growth. Since the merger in 2011, our earnings CAGR of 9.5% without promotes has outperformed the other logistics REITs by more than 350 basis points annually. This is the result of a unique business model which has consistently outperformed year after year. Turning to our view of the operating environment, our proprietary data shows that the strong demand we experienced in the third quarter has continued. Globally, leases signed in the fourth quarter were a record 65 million square feet or more than 1 million square feet per business day. This was driven by new leasing, which rose 22% year-over-year on a size-adjusted basis. A broad range of customers signed new leases in the fourth quarter, led by consumer products, food and beverage, electronics, and healthcare segments. E-commerce activity accounted for 19.8% of new leasing. The need for speed and flexibility is also reflected in elevated short-term leasing, which was up 58% in the quarter as 3PL retail and transportation customers raced to secure space ahead of the holidays. Lease proposals remain at healthy levels. In the U.S., fourth quarter net absorption was the highest on record at 100 million square feet and in excess of new supply of 90 million square feet. Rents in our markets grew by 3.2%, with all the growth coming in the back half of 2020. We anticipate rents to grow by approximately 5% in 2021. Houston is the only U.S. market on our watch list. As a reminder, we moved Atlanta and central Pennsylvania from our list in the second quarter. In 2021, we expect supply to decline year on year, balanced with demand at 280 million square feet each. Conditions are also healthy in our other markets across the globe. In Europe, rents began to rise in the fourth quarter, and we expect 2.5% of additional growth in 2021 led by Northern Europe and the UK. The implications of Brexit have been largely positive for us. As we anticipated four years ago when Brexit was first announced, inventory disaggregation will eventually lead to higher inventory levels in both the UK and the continent. We're watching new supply in Poland and Spain, But for context, these two markets account for just 1.7% of our share of NOI. In Tokyo and Osaka, historic high levels of supply are being met with very strong demand. Over two-thirds of the development pipeline is already pre-leased, and we expect market vacancies to remain below 2%. For China, supply is moderating, even as the market remains soft. In our portfolio, we leased a record 10 million square feet in the second half of the year, a credit to the great work of our new China leadership team. Turning to valuations, our logistics portfolio posted the largest sequential increase in a decade, rising 5% in the US and globally, and are now nearly 6% above pre-pandemic levels. Applying this increase to our $142 billion owned and managed portfolio, we estimate the value of our real estate rose by $7 billion in the fourth quarter. We expect continued fundamental improvement in 2021 and beyond based on three drivers, First, a powerful economic recovery, including the highest GDP growth in the U.S. in more than two decades. The combination of corporate and personal savings, as well as significant governmental stimulus, is a loaded spring, which will translate to significant economic growth in the back half as vaccines continue to roll out. Second, the pandemic accelerated the retail revolution. The e-commerce penetration rate jumped 480 basis points to 20% of goods sold in the U.S. in 2020. Based on early reports, e-commerce holiday sales grew by at least 30%. While we expect the share of goods purchased online to grow further, a pause later this year would not surprise us as consumers expand spending on services and experiences over goods. Our customers continue to plan for a long term. Retooling supply chains for increased heat fulfillment should generate cumulative incremental demand of 200 million square feet or more over the next several years. Third, we expect higher inventory levels. Inventory to sales ratios remain near all-time lows. We believe this had an impact on our customer space utilization as it ticked down to 83% in the fourth quarter. We see early signs of inventory restocking as containerized import volumes in the U.S. rose 24% in November and are on pace to set a quarterly record. Longer term, the need for more resilient supply chains will lead to higher inventory levels. We estimate that a 5% increase in inventory levels would produce incremental demand of nearly 300 million square feet in the U.S. alone. These changes will take years to play out, driving strong long-term demand. Turning to results, the work we've done to create the best in class portfolio scale and lowest cost structure in the industry is delivering exceptional financial results. 2020 core FFO excluded promotes grew by 14% and came in at the high end of our range at $3.58 per share. We also recognized record net promote income of $0.22 per share. Net effective rent change on a rollover in the fourth quarter was 28%, led by the U.S. at 32.1%, both high-water marks for the year. Our in-place-to-market rent spread now stands at 12.8%, up about 60 basis points sequentially. Collections continue to outpace 2019 levels, and as of this morning, we collected over 99% of fourth quarter rents and over 95% of January. Bad debt was 42 basis points for the quarter, and 43 basis points for the year, both below our expectations. Our share of cash seems to earn a wide growth with 3% and led by the US at 3.5%. We made meaningful progress on the sale of non-strategic assets acquired from Liberty. We settled disputes related to the construction of the Philadelphia Four Seasons Hotel and the Comcast Technology Center. We completed the dispositions of our 20% ownership interest in the hotel and the previously announced portfolio in the UK. To date, we have sold more than $600 million of former Liberty assets, exceeding our underwritten values by more than 18%. We now have less than $400 million of former Liberty non-logistics assets remaining, consisting primarily of our interest in the Comcast headquarters. For strategic capital, our team raised $3.1 billion in 2020, With 40% from new investors, we have yet to meet in person. Market and property tours as well as due diligence activities were all conducted virtually as our team capitalized on our early investments in digital infrastructure. Our balance sheet remains the best in the industry with liquidity and combined leverage capacity between Prologis and our open-ended vehicles of more than $13 billion. Our capital markets activity in the quarter brought our total average interest rate down to 2%. We will look for additional opportunities to refinance at attractive rates. In fact, at current interest rates in our mix of currencies, we could issue 10-year debt at a blended all-in rate of 1%. Turning to our guidance for 2021, here are the key components on an R-share basis. We expect cash seems to run a lot of growth to range between 3.5% to 4.5%. We're estimating bad debt expense to range between 20 and 40 basis points of gross revenues and average occupancy for our operating portfolio range between 95.5% and 96.5%. We expect a seasonal occupancy drop in the first quarter, then trend higher as the year progresses. For strategic capital, we expect revenue excluding promotes to range between $435 million and $450 million. Promote revenue will be negligible in 2021. In fact, we'll have net promote expenses of $0.02 per share for the year, which relates to the amortization of costs from prior period promotes. Our historic net promote income has averaged approximately 20 basis points of third-party AUM, which would be six to seven cents of earnings per share based on current promotable AUM. Looking ahead, recent property appreciation leads us to expect net promote income per share in 2022 to be at or above this historic average. We expect to start between $2.3 and $2.7 billion in new development, with 45% build-in suits, and for stabilizations to range between $1.9 and $2.1 billion. Dispositions will range between $1 and $1.4 billion, with the majority expected to close in the first half of 2021. We're forecasting net deployment uses of $350 million at the midpoint, and as a result, our leverage will remain effectively flat in 2021. Putting this all together, we expect core FFO, including the $0.02 of net promote expense, to range between $3.88 to $3.98 per share. Core FFO excluding promotes will range between $3.90 and $4 per share, with year-over-year growth at the midpoint of more than 10%, delivering another year of exceptional growth. We enter 2021 with optimism and confidence. Our ability to deliver value for our customers beyond real estate using our unmatched purchasing power and significant investments in technology, innovation, and data are significant competitive advantages that will drive further outperformance. With that, I'll turn it back to the operator for your questions.