Prologis, Inc.

Welcome to the Prologix Q1 2021 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 during this session, you'll need to press star followed by the number one on your telephone keypad. 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 first quarter 2021 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 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, Tim Arndt, Chris Caden, Mike Curliss, Dan Letter, Ed Neckeritz, Jean Riley, and Colleen McEwen are also here with us today. 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. Positive momentum from the fourth quarter has carried into 2021, as evidenced by our operating results, profitable deployment activities, and strong outlook. Demand driven by the powerful economic recovery, retail revolution, and higher inventory levels is unfolding more strongly than we expected. Headlines in the past 90 days have been a testament to the value of resilient supply chains. Those who were prepared are now growing and taking market share. There is great momentum moving through supply chains as signaled by retail sales, import volumes, and rising inventory levels. This will continue as inventory to sales ratios have just begun to rise as companies race to keep pace with demand. Starting with our proprietary metrics and our view of the market, space utilization is 84.5% of 100 basis points in the last 90 days. Our customers tell us their activity levels are rising at the fastest pace since 2019. Lease proposals reached 93 million square feet in the first quarter, a new high watermark, and are up 13% from 2020, adjusted for the size of our portfolio. Lease signings were 60 million square feet, our second highest quarter on record. Much of this activity is in new leasing, and as a result, retention was 69% for the quarter, as we're optimizing credit and rent. Given our high volume of lease signings, our operating portfolio was 96.4% leased at quarter end. Our leasing mix continues to broaden, with strong demand continuing from space sizes above 100,000 square feet, and small spaces demand is improving. E-commerce demand remains elevated, representing 25% of new lease signings in the first quarter. The balance of leasing is diverse, with outsized growth among companies that provide food and consumer products, as well as renewed momentum in the construction segment as housing expands. In the US, we now expect net absorption of 300 million square feet in 2021, which would be the highest in history. This strong demand is being matched by supply, and we expect 300 million square feet of deliveries this year. However, supply remains broadly disciplined. Years of historic low vacancy rates have constrained demand due to a lack of available properties, particularly in the most desirable markets. Many of our markets face shortages of land for logistics uses. In addition, obsolescence and conversions to higher and better use have added to this broad-based scarcity. Vacancies are below 2% in many of our top markets, such as Southern California, Toronto, Germany's main markets, and Tokyo. Our supply watch list continues to include just four markets, Houston, Madrid, Poland, and West China, which taken together account for just over 5% of our NOI. More recently, we've begun to see a rapid acceleration in replacement costs. In the U.S., we expect replacement costs to increase 20% to 25% over the two-year period through 2021, the fastest rate ever. Our procurement team is proactively mitigating these increases by securing favorable pricing and delivery schedules. For example, the team has procured steel for 5.2 million square feet of starts, a pricing roughly 5% below market, and providing us with a 10 to 20-week scheduled advantage. Strengthening demand and ultra-low vacancies are leading customers to increasingly compete for space, which is translating into pricing power. Rent growth for the quarter, which was up 2.4% in the U.S., outperformed our expectations. We are raising our 2021 rent forecast to 6.5% in the U.S. and 6% globally. Our in-place-to-market rent spread now stands at 13.6%, up 80 basis points sequentially. This represents future annual incremental organic and a wide growth potential of more than $600 million. Turning to valuations, logistics assets values are up a record 7.5% over the last two quarters. A way to capital has emerged coming both from rising real estate allocations and investors strategically reassessing their property focus type. Applying the valuation uplift to our $148 billion owned and managed portfolio, we estimate that the value of our real estate rose by more than $10 billion over the past two quarters. Moving to results, the work we've done to position the portfolio and optimize the balance sheet is continuing to deliver excellent financial results. For the quarter, core FFO was 97 cents per share, which includes net promote expense of 1 cent. Net effective rent change on rollover was 27%, led by the U.S. at 32%. We are prioritizing rents over occupancy in substantially all of our markets. Occupancy at quarter end was 95.6%, down 60 basis points sequentially, in line with normal first quarter seasonality. Rent collections remained very strong. We effectively had no bad debt expense in the quarter. Our share of cash seems to rely growth was 4.5%, driven by the U.S. at 4.8%. For strategic capital, our team raised $1.4 billion in the first quarter, as investor demand remains robust. Equity queues for our open-ended vehicles are at an all-time high, at more than $3 billion at quarter end. This level of interest is another indicator that valuations for high-quality logistics assets should continue to increase. Looking at the balance sheet, we continue to maintain excellent financial strength, with liquidity and combined leverage capacity between Prologis and our open-ended vehicles now totaling $14 billion. We were able to get in front of the recent increase in interest rates and issue $3.5 billion of debt with a weighted average rate of 96 basis points and a term of 11 years. This activity included the issuance of a 10-year U.S. dollar bond with a spread of 55 basis points, the lowest 10-year REIT bond spread ever, and the completion of our 15th green bond offering. The assets backing these bonds are the product of two decades of sustainable development. Our debt maturity stack is in excellent shape with minimal maturities until 2026. Subsequent to quarter end, we closed on a green revolving credit facility, adding $500 million more capacity to our already exceptionally strong liquidity position. Moving to guidance for 2021, our outlook is more positive across the board. Here are the updates on an R-share basis. We are increasing our cash same-star and alive growth midpoint by 75 basis points, and narrowing the range to 4.5% to 5%. We now expect that debt expense to be in line with our historical average at approximately 20 basis points of gross revenues, down from our prior guidance midpoint of 30 basis points. We're increasing our average occupancy midpoint for our operating portfolio by 50 basis points to 96.5%. Strategic capital revenue excluding promotes will now range between $450 and $460 million, up $12.5 million at the midpoint. The increase is primarily due to higher asset management fees resulting from increased property values. Whether you look at public comps or recent transactions, both would indicate that our strategic capital business is significantly undervalued. We are increasing development starts by $400 million and now expect a midpoint of $2.9 billion. Build-A-Zoots will comprise more than 40% of the volume. Our land portfolio today, comprised of land options and covered land place, supports approximately $17 billion of future development. We're increasing the midpoint for dispositions and contributions by $800 million in total. Consistent with the rise in asset values and higher contributions, we're increasing realized development gains by $200 million with a new midpoint of $750 million. Net deployment uses are now expected to be $50 million with leverage remaining effectively flat in 2021. Putting this all together, we're increasing our core FFO midpoint by 6 cents and narrowing the range to $3.96 to $4.02 per share. Core FFO excluding promotes will range between $3.98 and $4.04 per share, representing year-over-year growth at the midpoint of 12%. Our efforts over the past 10 years to reposition the portfolio and balance sheet have set us up to outperform in 2021 and beyond. And you're probably tired of us saying this, but it continues to be true. And with that, I'll turn it back to the operator for your questions.