Prologis, Inc.

Today's conference is scheduled to begin shortly. Please continue to standby and thank you for your patience. Today's conference is scheduled to begin shortly. Please continue to standby and thank you for your patience. THE END Thank you. Good day and thank you for standing by. Welcome to the Prologis Part 3 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Tracy Ward, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Sarah, and good morning, everyone. Welcome to our third 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 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. And also here with me today are Hamid Moghadam, Gary Anderson, Chris Caden, Tim Arndt, Mike Curliss, Dan Letter, Ed Neckroach, Gene Riley, and Carson Kelvig. With that, I will turn the call over to Tom, and Tom, will you please begin?

Thanks, Tracy. Good morning, everyone, and thanks for joining our call today. Third quarter results exceeded expectations and were underpinned by record increases in market rents and valuations. Operating conditions are being shaped by structural forces that continue to drive demand. At the same time, vacancies are at unprecedented lows. Space in our markets is effectively sold out. In the last 90 days, supply chain dislocations have become even more pronounced, with customers acting with a sense of urgency to secure the space they need. As demand surges, having the right logistics real estate in the right locations has never been more mission critical to our customers. During the third quarter, we signed 56 million square feet of leases and issued proposals on 84 million square feet. Spaces above 100,000 square feet are effectively fully leased. Our last touch segment continued to gain momentum with new lease signings growing by 44%. E-commerce requirements continue to broaden across a range of industries, with this segment representing one quarter of new lease signings. The activity was down sequentially as anticipated, although remains above trend. Given the sharp ramp up in demand, we are raising our 2021 U.S. forecast for net absorption by 14%, to a record 375 million square feet against deliveries of 285 million square feet, resulting in year-end vacancy reaching a new low of 4%. I want to point out that we revised our data set here this quarter to reflect only Prologis markets. As strong demand is being met with historic low vacancy, pre-leasing in the U.S. delivery pipeline has reached 70%, its highest level ever, as customers continue to compete for space. Acute scarcity in our global markets is driving record rent and value growth. In the third quarter alone, rents grew 7.1% in our U.S. markets, far exceeding our expectations. We are increasing our 2021 market rent forecast significantly to an all-time high of 19% for the U.S. and 17% globally, both up approximately 700 basis points. Our in-place-to-market rent spread jumped 500 basis points in the quarter and is now approximately 22% with an upward bias. This current rent spread represents embedded organic NOI growth of more than $925 million, or $1.25 per share. Record rent growth is translating to record valuation increases. Our logistics portfolio posted the largest quarterly increase in our history, rising 9.5% globally, bringing the year-to-date increase to an impressive 4%. An impressive 24%. Sorry about that. We expect that the ongoing network reconfiguration and expansion required to meet consumer needs and minimize disruptions will fuel demand tailwinds over the next decade. Switching gears to results for the quarter, core FFO was $1.04 per share with net promote earnings of $0.01. Rent change on rollover was strong at 27.9%, slightly lower sequentially due to mix. Average occupancy was 96.6%, up 60 basis points sequentially, and we reached 98% least at quarter end. Cash seems to run a light growth accelerated to 6.7%, up 90 basis points sequentially. We had a very productive quarter on the deployment front. Margins on development stabilizations remain elevated, coming in at 47%. Our development starts were $1.4 billion, consisting of 31 projects across 21 markets, with estimated value creation of more than $520 million. Turning to strategic capital, our team raised almost $500 million in the third quarter and $2.5 billion year-to-date. Equity queues for our open-ended vehicles were $3.4 billion at quarter end, another all-time high. Moving to guidance for 2021, our outlook has further improved, and here are the key updates on our share basis. We're tightening and increasing our cash same-store NOI growth to now range between 5.75% and 6%. We're increasing the midpoint for strategic capital revenue, excluding promotes, by $12.5 million and now range between $480 and $485 million. We expect net promote income of 5 cents per share for the year, an increase of 3 cents from our prior guidance. In response to strong demand, we are increasing development starts by $450 million to a new midpoint of $3.7 billion. Our owned and managed land portfolio now supports 180 million square feet and more than $21 billion of future build-out potential, providing a clear runway for significant value creation over the next several years. We're also increasing the midpoint for acquisitions by $500 million. The increased pace of acquisitions relates to our focus on covered land plays and urban last touch opportunities. We now expect net deployment uses of $650 million at the midpoint. Taking these assumptions into account, we are increasing our core FFO midpoint by $0.06 and narrowing the range to $4.11 to $4.13 per share. Core FFO excluding promotes will range between $4.06 and $4.08 per share, representing year-over-year growth at the midpoint of almost 14%, while deleveraging by more than 300 basis points. We expect to generate $1.4 billion in free cash flow after dividends, with a very conservative payout ratio below 60% range. While our year-to-date results have been extraordinary, most of the benefits from the current environment will accrue to the future, our 22% in-place-to-market rent spread, the valuation impact on promotes, our leverage capacity, the $21 billion of development, build-out, and most importantly, the vast opportunity set that our global footprint provides all pave the way for both significant and durable long-term growth. As I mentioned at the outset of my remarks, the disruptions within the supply chain won't be solved overnight. Prologis plays a unique role in the industry, and we're committed to helping find long-term solutions. That's why we're working closely with our customers, policymakers, and community partners to help address the problems, which range from warehouse space to transport infrastructure to labor scarcity. In closing, I want to highlight two important upcoming Prologis events. First, this Monday, we'll be hosting a webinar that will dive into our development and strategic capital businesses. And second, on October 27th, we're bringing together supply chain and community thought leaders to focus on some of the most pressing issues in logistics today, including workforce, energy, and transportation. Please visit our website for more information and the registration links for both events. And with that, I'll turn it back to Sarah for your questions.