Prologis, Inc.

Greetings and welcome to the Prologis fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference will be recorded. I will now turn the conference over to our host, Jill Sawyer, Vice President, Investor Relations. Thank you. You may begin.

Thanks, Diego, and good morning, everyone. Welcome to our fourth quarter 2022 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 other 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. I'd like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, our CEO, and our entire executive team are also with us today. With that, I'll hand the call over to Tim.

Thanks, Jill. Good morning, everybody, and welcome to our fourth quarter earnings call. Let me begin by thanking our global team for delivering an excellent quarter and year. We've had outstanding results despite challenging headwinds from the capital markets and the overall economic backdrop. In the face of this, our focus has been to serve our customers and investors, putting our heads down and executing on our long-term plan. As you see in our results, our portfolio is in excellent shape, driven by still strong demand and a continued lack of availability. This foundation for our business not only drove our nearly 13% increase in year-over-year core earnings, but it also sets up the company for sustainable growth for years to come. Earnings to results, core FFO excluding promotes was $4.61 per share and including promotes was $5.16 per share ahead of our forecast. In the fourth quarter, our operating results again generated several new records. occupancy increased to 98.2% with retention of 82%. The Prologis portfolio excluding Duke added 30 of the 40 basis point increase over the quarter. While we tend to quote occupancy, it is notable that the portfolio is 98.6% leased, a record that underscores the tightness across our markets. Rent change for the quarter was 51% on a net effective basis. The step down from our third quarter rent change of 60% is a reflection of mix and not market rents. In fact, market rent growth exceeded expectations during the quarter, increasing our lease mark to market to a record 67%. These results drove same store growth to 7.7% on a net effective basis and 9.1% on cash. The Duke portfolio, having closed on October 3rd, is fully integrated in these results with the exception of same-store growth, which will not be reflected until the first quarter of 2024. On the balance sheet, while access to the debt markets has remained challenging for many issuers, we successfully executed a number of transactions during the quarter, raising over $1.1 billion at an interest rate below 3%, including $700 million of new unsecured borrowings out of Japan and Canada. Our credit metrics continue to be excellent, and we've maintained over $4 billion of liquidity at year end with borrowing capacity across Prologis and the open-ended funds of $20 billion, expanded significantly due to our balance sheet growth from the Duke acquisition. With regard to our markets and leasing activity, the bottom line is that conditions remain healthy and there is little we see across our results or proprietary metrics that point to a meaningful slowdown. We see a normalization of demand And when combined with low vacancy, it continues to translate to a meaningful increase in rents. Across our markets, rent growth was nearly 5% during the quarter, driving the full year to 28%. Proposal activity per available space was consistent with our recent history. And given persistent low vacancy, there is simply a very small number of units to even propose deals on. As evidenced, over 99% of our portfolio is either currently leased or in negotiation. Utilization remains high at 86% near its all-time record. And deal gestation ticked up over the quarter, indicative of more careful consideration and time being taken in leasing decisions. While we were watching e-commerce carefully, its share of overall retail sales has increased to 22%, which is 600 basis points above its pre-pandemic level. Putting the nuance of mix, timing, and other factors aside, As measured by retention, occupancy, or rent change, it is clear that customers need to commit to space in market conditions which offer them very little choice. In terms of supply, the development pipeline across our market stands at 565 million square feet, and our expectation for the year is that the pipeline will decline. Deliveries will put modest upward pressure on vacancies from 3.3% today toward 4% later in the year. However, new development starts are slowing in response to the market environment, which will reduce vacancies in late 23 or 24. In Europe, we expect deliveries to outpace absorption by approximately 30 million square feet, expanding the current 2.6% vacancy rate to approximately 3.5%. Finally, and as expected, our true months of supply metric grew to 25 months in the U.S. from 22 months last quarter. As a reminder, this metric has averaged roughly 36 months over the last 10 years. In capital markets, transactions continue to be slow in the fourth quarter, making price discovery challenging. That said, return requirements are trending to the low to mid 7% range. This expansion further affected appraised values in our funds, although continued rent growth has mitigated some of the effect. Our U.S. values, which are appraised by third parties every quarter, declined 6% this quarter and 7% over the entire second half. In Europe, values declined approximately 12% during the quarter and 16% over the half. Our open-ended funds have received only modest redemption requests, less than 3% of net asset value during the quarter, totaling 5% across the second half. Our flagship funds have strong balance sheets with low leverage, largely undrawn credit facilities, cash on hand, and undrawn equity commitments. While we believe the value declines over the second half reflect market, investors are still adjusting to a new environment. Because we strive to be consistent in our actions and fair to all investors, we will redeem units, call equity, and resume asset contributions when price discovery has run its course. We expect that to be one to two quarters away, likely sooner in Europe. This will ensure certainty, fairness, and consistency to all of our investors. Turning to our outlook for 2023, while our macro forecast assumes a moderate recession, which may put headwinds on demand, our business is driven by secular forces and long-term planning by our customers that should limit the impact unless such a downturn becomes significant and protracted. As mentioned earlier, we believe vacancy will build in the market and our portfolio, both of which are unsustainably low. Putting this sentiment together with our outlook on supply and demand, our 23 rent forecast calls for approximately 10% growth in the U.S. and 9% globally. We acknowledge that our rent forecasts have proven conservative in recent years, but we are comfortable with this starting point given the environment. Specific to our portfolio and on an hour share basis, we expect average occupancy to range between 96.5% and 97.5%. roughly 50 basis points lower than the 22 midpoint. Combined with rent change, we forecast to generate net effective same-store growth of approximately 8% to 9%, with cash same-store growth between 8.5% and 9.5%. Given these assumptions, we believe our lease mark-to-market will be sustained or even increase over 23, ending the year between 65% and 70%, and providing visibility to an incremental $2.9 billion of NOI after the more than $300 million that will become realized over the course of this year. We expect G&A to range between $370 and $385 million, reflecting not only inflation in wages and other corporate costs, but also additional investments we are making in our essentials business, particularly in the energy teams. In that regard, we expect the contribution to FFO from essentials to range between 7 and 9 cents this year. This reflects 70% growth in revenues and tax credits from 22, but offset in the near term by our higher Duke-related share count and the G&A investments just mentioned. In terms of operational metrics for the business, we expect to add 115 megawatts of solar power over the year, driving the portfolio to approximately 520 megawatts by year-end. It's worth noting that we closed 2022 as the second largest on-site power producer in the U.S., a position we will build upon with our plan for one gigawatt of production and storage by 2025. We also forecast to have over 20 EV charging clusters installed and operational by year-end. In deployment, we will continue to be disciplined in our approach to new starts. We have over $39 billion of opportunities to select from in our land bank. In between our expectations for bill pursuits and logical markets for spec, we see an active year of starts initially to range between $2.5 and $3 billion with a real opportunity to grow as conditions warrant. As mentioned earlier, we plan for redemptions to be cleared out over the year and private fundraising to resume. Accordingly, we forecast contribution activity to occur primarily in the second half and resulting in combined contribution and disposition guidance of $2 to $3 billion. Finally, in strategic capital, we forecast revenues excluding promotes to range between $500 and $525 million, which is impacted by valuation write-downs across 22 and the first half of 23. We are forecasting net promote income of $0.40 based on an assumption that values in USLF, primary source of 23 promotes, will decline further from values at year end. Every 1% change in asset value equates to slightly less than 2 cents of net promote income. Putting this all together, we expect core FFO excluding promotes to range between 5 and 5.10 per share. At the midpoint of our guidance, this represents approximately 9.5% growth over 2022. We're guiding core FFO including promotes to range between 5.40 and 5.50 per share. In closing, this guidance builds upon an exceptional three-year period of sector-leading earnings growth. At our 2019 Investor Day, we presented a three-year plan targeting 8.5% annual growth, yet achieved nearly 14% over this period, 550 basis points of annual outperformance. We expect 2023 to be a year where headlines continue to be disconnected from our business and ability to deliver strong growth and value creation. While there are many unknowns generally, there are more knowns in our business that are clear, such as our lease mark-to-market, significant and visible opportunity in our land bank, a need and excitement for a new generation of sustainable energy solutions, and a dedicated team that is the best in the business and laser-focused on delivering leading results. We'll now turn the call over to the operator to take your questions.