Prologis Inc (PLD) — Q4 2017 Earnings Call Transcript

Thanks, James, and good morning, everyone. Welcome to our fourth quarter 2017 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we’ll hear from Tom Olinger, our CFO, who will cover results and guidance. And then Hamid Moghadam, our Chairman and CEO, who will comment on the company’s strategy and outlook. Also, joining us for today’s call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly, Diana Scott, and Chris Caton. Before we begin our prepared remarks, 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 and SEC filings. Additionally, our fourth quarter results press release and supplemental documents 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. With that, I’ll turn the call over to Tom and we’ll get started.

Thanks, Tracy. Good morning and thank you for joining our fourth quarter earnings call. I will cover the highlights for the quarter, introduce 2018 guidance, and then turn the call over to Hamid. We had an excellent quarter and an outstanding 2017. Core FFO was $0.67 per share for the quarter and $2.81 per share for the year, reflecting an increase of more than 9% over 2016. We earned record net promotes of $0.16 per share for the year. Excluding promotes, core FFO was also up 9%. It's worth taking a step back to highlight that over the last four years we delivered a core FFO CAGR of 13% while also deleveraging by 1100 basis points. We leased nearly 170 million square feet in 2017 with more than 42 million square feet in the quarter. Well-located logistics product remains mission critical for our customers. Global occupancy at year-end reached an all-time high of 97.2%, a sequential increase of 90 basis points. The U.S. led the way with a record occupancy of 98%. In Europe, year-end occupancy reached 96.6%, up 120 basis points sequentially setting the stage for rental growth in 2018. Notably, France was up 340 basis points sequentially. Our share of net effective rent change on rollovers in the quarter was 19%, with the U.S. at nearly 30%. Global rent change was down sequentially due to mix with higher leasing in France, Poland, and the Central U.S. Our share of net effective same-store NOI growth was 4.7% for the full year and 4.1% for the quarter. The quarter came in below expectations due to an expense forecast miss as well as lower than expected average same store occupancy. On the development front, we had an extremely productive year creating significant value for our shareholders. I would like to highlight development stabilizations which came in slightly ahead of expectations and had an estimated margin of 29% and value creation of $583 million. 2017 was also an excellent year for our strategic capital business. We combined several ventures reducing the number of vehicles since the merger from 21 to 8, further streamlining our business. We raised $2.9 billion in new capital from investors around the world and grew our third-party AUM to $32 billion. Our strategic capital business delivers a durable and consistent revenue stream with 90% of fees coming from long-term or perpetual vehicles. Turning to capital markets. During the quarter, we used a portion of our excess liquidity to redeem $788 million of near-term bonds. For the full year, we lowered look-through leverage by 340 basis points to 23.7% on a market capitalization basis. We continue to have significant liquidity of $3.6 billion and remain well protected from movements in foreign currency as we ended the year with more than 94% of our net equity in U.S. dollars. Moving to guidance for 2018, which I will provide on our share basis. We expect net effective same-store NOI growth of between 4% and 5%. This is set in accordance with the new logistics sector definitions that we announced last week. I am proud of our sector for taking leadership on this important initiative. For comparison, our 2017 net effective same-store results would have been 4.2% under this new definition. As I mentioned previously, we had expected this impact to be less than 50 basis points. Cash, same-store NOI growth for 2018 should be approximately 100 basis points higher than net effective as the lag from longer lease terms and steeper rent bumps continues to close. Development starts will range between $2 billion and $2.3 billion, roughly in line with 2017. Build-to-suits will comprise about 45% of this volume. Dispositions and contributions will range between $2.3 billion and $2.9 billion. Given broad buyer interest, particularly for larger portfolios, we may elect to accelerate dispositions and effectively close out our remaining non-strategic assets in 2018. I want to point out that the contribution volume includes the expected re-capitalization of Brazil. For strategic capital, net promote income will range between $0.05 and $0.07 for the full year, consistent with prior years. There will be a difference in the timing of recognition between promote revenue and its related expenses. We expect to recognize $0.01 of promote expense in each quarter of 2018. From a timing perspective, we expect to recognize roughly two-thirds of the promote revenue in the first quarter. For net G&A, we are forecasting a range between $227 million and $237 million. For perspective, we have held G&A roughly flat over the last five years while growing AUM by more than $14 billion. Related to FX, our 2018 estimated core FFO is fully hedged and we have already hedged most of 2019. We don’t expect any material impact on our operations or earnings as a result of the new tax reform bill. Putting this all together, we expect core FFO to range between $2.85 and $2.95 a share for 2018. Core FFO growth excluding net promote income is expected to be 7%. This growth is particularly strong given further balance sheet deleveraging. We expect average leverage in 2018 to be approximately 200 basis points lower than last year. For reference, a 100 basis point increase in leverage translates to approximately 1% of core FFO growth. To wrap up, we had a great quarter and year and are entering 2018 with strong momentum. The mark to market of our portfolio currently stands at 14% globally and more than 18% in the U.S. with an upward bias. This positions us for strong operating performance for the next several years. Our best-in-class balance sheet has significant liquidity and investment capacity to self-fund our growth and to capitalize on opportunities as they arise. With that, I will turn the call over to Hamid.

Thanks, Tom. I will keep my remarks short as our business and our markets continue on a positive trajectory. Market fundamentals are strong as they have been in my career. In the U.S., occupancy has continued to test new highs and rental growth accelerated in 2017, led by the large coastal markets. Net absorption was healthy last year, although it was constrained below 2016 levels as a result of limited new supply. Market dynamics today are highly favorable for logistics and should remain so for the foreseeable future. Today, about 30% of our global portfolio consists of in-fill assets which are positioned for last touch delivery. In our view, notwithstanding all the market noise, it will be impossible to duplicate such holdings in any scale for late adopters of the now very popular last mile strategy. In Europe, cap rate declines have lifted value significantly. While we expect cap rates to compress even further, we have now reached an inflection point for rental growth in New York. Fueled by improved conditions on the continent, we expect rents to accelerate for the foreseeable future and narrow the gap with the U.S. The lag in rental recovery in Europe will carry our momentum beyond the inevitable point that the U.S. markets normalize. Looking ahead, there is plenty of gas left in the tank. We are laser-focused on capturing rental growth and deploying capital in profitable developments. The mark to market of our portfolio has increased steadily over the last 18 months, which will also extend the runway for continued rental growth. Our scale provides us with attractive capital sourcing and deployment opportunities around the world. We will continue to deliver value by putting our well-located land bank to work and by leveraging our unparalleled customer relationships. I will close by saying that our business strategy remains unchanged. Our balance sheet continues to strengthen and our portfolio is uniquely positioned to deliver strong results well into the future. We remain vigilant about unforeseen risks in this environment but are very optimistic about our prospects in 2018 and beyond. I would like to now turn it over to the operator for Q&A.

It's Michael Bilerman here with Manny. Tom, in your opening comments you talked about the fourth quarter same-store numbers and you mentioned an occupancy miss and an expense growth miscalculation. Can you elaborate on those points, their impact, and how these will revert in 2018?

Thanks, Michael. So about half of the difference was due to the fact that we missed our expense forecast by about $2.5 million, which in the fourth quarter resulted in about a 60 basis points impact. And again, we corrected the expense forecast for 2018, so there is no impact on 2018. The other driver was that same-store average occupancy was lower than we had expected. We actually had a 10 basis point negative impact of same-store occupancy in the fourth quarter when we had anticipated a positive increase. To give you context, our share of average same-store occupancy in the quarter was 96.5%, but our ending same-store occupancy was at 97.3%. So it was 80 basis points higher. As you can see, the leasing occurred later than we expected.

On the occupancy guide, Tom, just curious how much of that is just conservatism from where you guys ended the year versus maybe your expectations about lower retention from kind of pushing rents even harder in '18?

Yes. I think it's the latter, Craig. We are going to continue to push rents to get the right long-term economic results and higher same-store growth. We may sacrifice occupancy in the short-term, just like you saw in Q4, for the right long-term answers.

If you look at what's happening in the office world and the retail world, base building and re-leasing CapEx are going up significantly and investors' awareness of these CapEx numbers are also going up significantly. When you are leasing space, are you providing turnkey TIs when TIs are needed? How much money are you putting into the base building, and how much money is the tenant putting into the base building? Talk a little bit about your re-leasing cost.

Sure. John, this is Hamid. Let me start and then turn it over to Gene for some color on the specifics. I think the real estate industry generally, for the last 35 years that I have been involved, has always seen CapEx strong. Because I think there are all these weird things that people count as recurring, non-recurring, value-enhancing, and non-value enhancing. And I think those problems are particularly acute in the sectors you mentioned. I think probably apartments and industrial are the most straightforward because we don’t have major renovations and all those kind of other complexities going on. So generally the problem that you raise is a serious problem that AFFO many years ago tried to address but in my opinion didn’t do a very good job of it. So that is the general comment. I would say many of our tenants invest above and beyond our contributions significantly for improvements. Typically, our improvements once the building is second generation consist of paint and carpet and maybe a little bit of wall movement in the office portion. Very little in the warehouse space. Now, we have customers that may put in nothing about that and there are a couple of occasions where our customers are actually using the buildings for data centers and may put in a thousand or more dollars a square foot in there. But that’s really not reflected in the rent that we collect. We are not in the business of over-improving space at our expense in temporary and specific customized improvements for anybody just to pump up the rent. I just want to be really clear about that. Just to make this really simple, the way I would like to look at CapEx is actually to add up all the CapEx and look at it as a percentage of NOI. Historically, in our business, that number has been about 12% to 15% depending on where you are in the cycle.

You guys have come a long way derisking and delevering the balance sheet over the past several years and it looks like you plan to continue that process in 2018. As you touched on, that usually comes with lower growth than you could achieve at higher leverage. So how do you guys think about setting the appropriate level of leverage and finding the balance between safety and growth?

So, Blaine, I think when we did the merger and we laid out some balance sheet objectives, that was really where we set the long-term capital structure of the business. At that time, we said we want to have a top three balance sheet in the industry, and we got a lot of giggles at that point. Here we are now with just under 24% leverage and an A-minus rating, which we are happy about. I think the recent declines in 2017 and the projected declines in 2018 in leverage are not something that we are doing consciously to further improve the balance sheet. They are just a byproduct of executing our capital recycling strategy, and you can't do that perfectly. At some point, when we are done with disposing of our non-strategic assets, which we expect to have completed in 2018, our leverage will probably drift up by a few hundred basis points, thus propelling our growth to where we really want it to be in the long-term. But that totally depends on investment opportunities and the attractiveness of those capital deployment opportunities. Bottom line, our leverage is lower than we planned it to be, but that’s consistent with the other aspects of our strategy.

Maybe Tom, I wanted to go back to one of your comments that you made in the prepared comments about accelerating dispositions in non-core assets as the year progresses. It sounds like that’s not a done deal but I would like to know maybe what would get you over the hump of deciding to sell more. Is that a function of perhaps accelerating developments or finding acquisition, or just maybe new supply hitting the markets that you might be worried about? Any additional thoughts please.

Yes, Dave, there are no humps to get over. Just to put everything in context, we sold $11.6 billion of real estate since the merger. I think that represents a couple of companies added in our sector. So we have been very deliberate and active in the dispositions market, probably more than anybody in the business. We have approximately $1.6 billion of non-strategic assets left. Bottom line, we sold 88% of what we wanted to sell in the non-strategic area. Honestly, the improvement in the markets and the strength of the markets has meant that we got a lot of these other non-strategic assets at least up sooner than we thought we would. So I think 2018 is the time to execute that plan. Mike, you want to add any color to that?

Yes, we saw last year, both in Europe and the United States, some of our smaller portfolios were aggregated. There was a lot of buyer interest in some larger portfolios and we expect that trend to continue this year. We are very optimistic about our ability to execute our sales plan or even slightly more than we projected.

Hamid, I want to get your latest thoughts on new supply in the U.S. and which markets, if any, you might be concerned about.

Let me do this. Let me have Gene start, and maybe Chris to provide some color on that.

So with respect to new supply, right now we would call out probably Dallas, Chicago, and Louisville, as having supply in excess of recent demand. And to drill into this a little bit, as we look forward, Chicago kind of concerns us a little bit, but construction is way down in Chicago today. They had 22 million in the pipeline a year ago, now they have 9 million square feet. So that speaks to the conservatism we have seen in the few markets during this economic recovery. Those are the markets we would call out for excess supply.

Hamid, at this time last year your outlook called for supply-demand equilibrium and moderation in rent growth to the mid-single digit range. Rents, obviously, far outpaced expectations coming in nearly 10%. And in your portfolio, occupancy reached an all-time higher at the end of the year, above even your expectations at the end of 3Q. And this is all despite the fact you're actively really pushing hard on rents. So it may be a very simple answer here but are you seeing anything today, other than just being one year further into this cycle, such that 2018 can be set up for a similar type of better than expected outcome?

Yes. That simple answer is, no, we are not seeing anything different. In fact, markets at this point are stronger than they were last year. Last year, you may remember, there were a couple of markets that we had seen excess supply, including by the way, Chicago, that Gene just mentioned. We had warned the market that maybe some of these markets were getting a little soggier. Then as you point out, we ended up getting between 9% rental growth in the U.S. so we clearly got that one wrong. We were too conservative regarding future expectations. Having said that, nobody is going to go and forecast 10% rental growth into the future. We are in unchartered waters. So I think what we are counting on today is a growth rate much less than that, and our assumptions and our guidance are based on numbers that are about half as big as last year's exceptionally high rates. But who knows? It may be higher or lower, and we don’t have perfect insight into the future. So, I don’t know; we will see. My hope is that we will even do better.

Could we just talk a little bit more about the supply questions? How much do you think new supply actually impacts your portfolio? And I will use this as an example. For example, if you have an asset in Carson and LA by the Port of Long Beach, I wouldn’t think new supply really impacts your ability to raise rents in that asset. So if you take that thinking across your larger portfolio, how would you describe the real impact from new supply?

In some of the markets like the South Bay, just to pick the example that you mentioned, it's impossible to add any supply. In fact, there is supply coming off, and there is negative supply. San Francisco has had negative supply because people are turning properties into apartments. So there is very little supply there. And what happens is that there is a substitution of locations, as people go further out, compromising on some other parameters just to be able to get the space that they need. Let me throw it to Gene for some more color on that.

If we actually look at our strong markets, there are markets with obviously strong demand and great net absorption numbers. Some have a decent amount of supply as well. If you look at LA County, for example, the net absorption isn't very impressive, neither is the supply because it's infill. But the rent growth is 17%, 18%. So there are a couple of markets that fall in that category today. New York, New Jersey is one of them, with an 18% rent growth last year. Much of the Bay area falls in that category, Seattle. So your question was really about supply. In many of these infill markets, supply is really one-off, and as a percentage of what's going on in the base, it's very small.

I think that is correct. Ki Bin, I think the key differentiator in rent growth last year was barriers to supply, either by market or in terms of product size. You saw better performance in smaller versus larger products. But let's also keep in mind that there has been a real slowdown in the rate of supply growth. Starts last year and for that matter, the supply pipeline, up 5% to 10%. But historically it would have been double digits. So there is this discipline in the supply side that is also affecting rent growth.

Just have a two-part question. One, Tom, I am not sure if you mentioned it, but were the effects of the uniform guideline on the same-store portfolio construction taken into account in the '18 guidance? And by the way, I obviously appreciate you guys working on that together. And then the second question, maybe for Hamid or Gene, I think multistory construction has become a much more popular topic in the United States. Do you see any pitfalls for any competitors or peers in that strategy going forward? I know you guys are obviously thinking pretty thoughtfully about it.

Eric, this is Tom, I will go first. So the impact on our same-store operating metric is about 40 basis points in 2017. So if you look at it on a comparative basis, 2017 under the new methodology would have been 4.2%. The midpoint of our new guidance under the new methodology for '18 midpoint is 4.5%. So we are seeing acceleration on a comparative basis on same-store year-over-year.

Okay. And with respect to the multistoried product, I am not sure how popular it is. There are a lot of people talking about it, but to my knowledge, there is only one multistory building being built in the U.S., but for sure over time there will be more. We have a couple in the pipeline. It's all about land value and growth pressures like the ones Gene talked about in some of these infill markets that you know well. So I think there is more talk than action. These are not easy things to do. Eventually, people will get the technology right but it's tough to find a 10 to 20-acre piece of land in a major metro area to build one of these things; and all the mitigation measures, traffic, and height limits make it really difficult to do this. So I think it will only take place in those markets where rents are solidly in the mid-double digits, mid to high teens, or low 20s where it's feasible to do this kind of construction.

Eric, the only thing I would add, which Hamid really implied, is that development schedules are much, much longer. This is an investment that requires a lot of patience, and you are looking way into the future. So I think it’s a different type of development. I am not sure a lot of people in this sector will ultimately jump in. It’s very expensive and involves long schedules.

You know, some of these projects in the U.S., which is cheaper than Japan, can easily cost $150 million, $200 million. A couple of the ones we are looking at are $0.5 billion in investment, approaching the kinds of investments typical of good high-rise office projects, and I am not sure there are that many people around that can write those checks.

Following up on NREIT, if I am remembering correctly, I think the talk was that your portfolio was roughly 14% below market on a leased basis. Given the 19% leasing spreads, kind of your share of those this quarter, what's that below market leasing looking like as of right now and how do you see it trending through 2018?

Thanks. It's Tom. Our current in-place to market at the end of the year is 14% globally, over 18% in the U.S. Two things you need to consider are roll and the composition of the roll and rent growth. Those are the two drivers of how that mark to market will move. Looking into 2018, I think there is an arrow up on the mark to market just as we are going to have about 20% roll, and you look at the composition of that roll. As Hamid said, we are thinking about 5%-ish global rent growth. So I think there is an arrow up on that number.

Just curious on the demand side, if you are seeing any shifts in where the demand is coming from over the past quarter or two. And maybe if you just give us your best guess for the year and maybe for the quarter. What percentage of your leasing has been more specifically for the e-commerce channel?

I will take that, and others may want to jump in. So the customer segments that have been active really haven't changed much over the last couple of quarters. Transportation, construction, food, and auto have also been strong, and e-commerce as a percentage of demand has also been fairly steady. As we look out into this year, that’s a tough thing to predict because there are several participants in that sector who have big plans for new distribution rollout. How much of that ends up being absorption in this year is really tough to say. But I would guess, on balance, I would see an upward trend for e-commerce in 2018. However, those other industries I mentioned are also very strong right now.

Just to add a little something on Europe, the European market continues to strengthen. As Tom mentioned in his opening remarks, we saw significant leasing activity in southern and central Europe, which is a huge positive for us. Demand is starting to pick up in those markets. I think the important statistic in Europe is that market vacancies are down to 5.5% and we are forecasting them to go even lower in 2018. So you should see increased opportunities for rental growth going forward.

I think residential construction, and thus residential related absorption, is going to be higher next year, or I mean in 2018, in the U.S.

So occupancy decreased in America, I assume, for the fifth straight quarter. Can you provide some color on what's driving that and do you expect it to inflect any time soon? Thanks.

Yes. If you are looking at owned and managed, you are going to see Brazil drag that down a bit. If you remember, we consolidated Brazil in the third quarter, and occupancy on that owned and managed portfolio was 78%, kind of staying there. We obviously think it was a great time for us to get in there and get that portfolio. More to come on Brazil, but I think we are definitely going to see a turnaround there in 2018. When you look at the U.S., for example, in Q4, the U.S. was a record 98% occupied. All-time record.

I mean outside of Brazil, the occupancy was very high, very high in Mexico, I might add.

Question on your development pipeline. Should we expect maybe a mix, a shift between spec and build-to-suit development going forward? I was thinking there would be more build-to-suit.

Josh, this is Mike. Last year we did about 47% build-to-suit. As we look out over the next year, we expect to range in that similar zone. I think the high levels of build-to-suit are driven by the lack of the type of space our customers want to be in, particularly in global markets. We expect that number to feel pretty solid for 2018.

Well, 47% historically is super high. So probably the number across the cycle is more like 25%. I don’t know if anybody will get used to these kinds of numbers. We were surprised by that number being that high.

I know there has been a lot of questions on development. I guess Hamid, I am just trying to think through the land bank and your desire to get the land bank down but also continue the development pipeline. How are you guys just sort of thinking about replenishing land today, and what are you seeing in terms of land acquisition costs and development yields on kind of new land being purchased?

Yes, Steve. Our goal is to get down to two years of development of land supply. Our development guidance bounces around every year, but you may remember back in 2010, the dark days of 2010 and 2011, I think the first analyst meeting we had as a merged company, we talked about development volumes being between $2 billion and $3 billion in aggregate—not our share but in aggregate. That’s exactly where we are. We are now around $3 billion in aggregate. The land required for that is about $750 million. So about a quarter of the total investment volume. So if you literally want to own two years of land, that’s about $1.5 billion of land and that’s more land than we currently have on the books. Maybe not in market value but just in terms of book value. We are pretty close to our long-term goals on land. We may want to push it a little bit lower but not too much lower than where it is because we need that land to support our business. Getting land is very difficult today in the markets that we care about most. The exactions and all the fees that people pile on, the traffic mitigation measures, are making it really hard. Some of these parcels of land, you have to work on for a number of years before you can get entitlements for them. We are fortunate to have land for almost $8 billion to $9 billion of development on our books. On the margin, we’ve been adding land at the rate of about $400 million a year and chewing through land at the rate of about $600 million to $700 million a year. We are slowly wading down the land bank by $200 million to $300 million a year and that’s how we have gotten down to where we are. About $150 million of our land bank is what we call C and D category land bank, probably more detail than you care about, but those are essentially parcels of land that we inherited that we wouldn’t have bought. Those take longer to absorb, so you need to consider that when thinking about our future land strategy.

Steve, the other thing to consider from the land that you don’t see show up in our land bank is our redevelopment opportunities. When you think about multistory, that’s going to go on land that’s either sitting in the operating portfolio today or in other assets. I think we’ve done a really good job over the last four to five years of buying what we call covered land plays, which have some sort of income stream, whether it's a truck terminal or something like that, where we are going through entitlement while still flipping a coupon. There’s more redevelopment opportunity there than what's just on the land bank.

Plus we have an increased emphasis on option agreements which will continue to add capacity to it.

As we are thinking about tax reforms and their impact on demand for warehouses, I am just curious as you talk to your customers, and I know you guys have a committee of customers you are talking to, I am not sure you have spoken with them since the tax reform bill. But I am thinking about demand for leasing warehouse space and one aspect of it is expensing equipment over the next five years and if that might cause businesses to accelerate growth plans and buy equipment that will obviously need warehouses to go in. I know if you have any bigger thoughts on the tax reform bill or maybe that specifically and what it means for warehouse demand.

We essentially get two questions about tax reforms. One is the one that you asked. Let me just answer that question: No, we haven't had a customer advisory meeting in January yet. So, other than casual discussions, we haven't had a really organized high-level meeting with a bunch of customers to report any trends. The net impact of the tax program is that U.S. growth by people who know a lot more about these things than I do is projected to be faster by about 25 to 50 basis points. So that additional growth is going to translate to more demand for our kind of product. I wouldn’t be surprised if it translates to 30 million to 40 million square feet more absorption if the product were there. I am not sure the supply is going to respond quickly enough for that product to be there. But I think it's going to be good for business. The second concern we have gotten is whether the tax act is going to shift more of the demand to the middle of the country because the coasts took a hit due to new tax structures. On the margin, the 25% to 50% extra GDP growth is going to benefit the overall economy, but I can't definitively say whether that will raise the boats in the Midwest more than those on the coast. But I do believe all areas will see a benefit as a result of the higher GDP growth.

If we think about shadow supply, maybe using the retail closures and conversions as an example, how much of that type of supply do you think about, or worry about coming and disrupting maybe more serious construction or is it down where you guys are doing?

Manny, that’s a good question, and I think that’s a problem that has hurt the office sector in the past at inflection points. We have a pretty good handle on shadow space because we track utilization on a quarterly basis and we've done that consistently for the last ten years. We have both period-to-period comparisons and actual absolute comparisons. Right now utilization continues to be at the highest level it’s been, within very few points of the highest level. There is not a lot of slack in the system, and people are not hoarding space the way they were during the first dot-com boom in the early 2000s. After the global financial crisis, when the vacancy rates dropped from 14% to 4.5%-5%, they just don’t have that opportunity. We don’t think there is a lot of shadow space at all.

Just two quick ones. I guess, first, on the $1.06 billion in non-core that you guys would still sell over time. What's the growth rate or internal growth rate on that versus the rest of the portfolio? And then second, just on the development starts, you guys are about $400 million higher on the initial guide here versus where you were last year. I guess I am just curious about the current visibility on the $2 billion to $2.3 billion at this point and just a sense given the mix of built-to-suit versus spec, how we should think about margins.

Craig, it's Tom. On your first question regarding the relative return on what we are selling versus what our in-place portfolio is, I don’t have those numbers readily available. But clearly, the rent growth we are seeing in our whole portfolio is substantially greater than the rent growth in the non-core markets that we are selling.

Yes. Historically that number has been about a cap rate differential of about 150 basis points across the cycle and a rental growth benefit of about 250 basis points. So there has been roughly a 75 to 100 basis point advantage by taking lower yields in constrained markets and making it up in growth. I can’t say exactly what it is on the mix we are selling, but Mike, why don’t you talk about visibility of the development?

In terms of visibility, it's well over 90%. I would say that’s as good as it has been since the merger, which gives us confidence in our forecast for the year. Margins; you should expect us to be in the mid to high teens with good solid numbers based on the level of activity as well.

And Craig, when you look at our share of starts, they are pretty comparable year-over-year.

I have a question on protectionism. Could you give some comment as to your thoughts on the impact if the United States would walk away from NAFTA? And secondarily, could you also provide your thoughts over Brexit in Europe next year?

Welcome back, David; haven't talked to you in a while. Regarding protectionism, there is a lot of concern, but as you know, we are not so focused on the production side of that supply chain. We are focused on the consumption side of that supply chain. So frankly, as long as people in LA and New York and all that continue to have to feed and clothe themselves, I really don’t care whether that inventory is coming from China, Kansas, or Mexico. We are really focused on where consumption takes place, and that’s where we have chosen to concentrate our investments. If your concern is mostly on the production side—which it likely is because of all types of interference—it's best to talk to those who focus on those strategies. As for Brexit, a lot of people got all excited about it when it was first announced as a surprise. Our stock in one day went down five bucks, but our occupancies in the U.K. went up, and we had significant rental growth. I would say the U.K. has slowed a little bit since that torrid pace back in 2016, but together with Germany, the U.K. and Germany are probably the two best markets we have in Europe, and I would put them up against any markets anywhere, including the U.S. We have not really seen any evidence of Brexit having an impact yet, and when it happens, I don’t think it's going to be material. The concerns about Brexit scared away a lot of capital and development that would have occurred, so the market actually ended up tighter in the U.K., and I think that will continue.

Another thing that came up, Hamid, my understanding is that Amazon has 30 or 35 build-to-suits out there in the market which is a new prototype with a much smaller footprint, maybe 100 to 200,000 square feet, but 75 feet clear height and multiple levels with highly automated elevator systems. Can you comment on that prototype and how you feel about it?

So I can comment, but I will let Mike comment because I am not sure what parts of our discussions with them are confidential and which parts are not. So Mike, why don’t you talk about that?

Yes, John, there is certainly a lot of buzz about the sizable rollout they have underway. To put some things in perspective: in any given year, there is massive amounts of RFPs that are suggested, and those could play out over a couple of years. This year is a little big different with some unique approaches to the buildings. It's early days on that, and we are looking at that closely, just like we did with other buildings we have done for Amazon. To the extent that they are very unique or we think it would be better to sell those, we will certainly look at doing that as well. Amazon is clearly an innovator, and we will keep up with them.

Yes, the only thing I would add to that, John, is that Amazon has pretty much got the same strategy we do—they want to be near where the consumers are. Those markets are where we have the same strategy as them. I suppose we went public earlier. But it’s becoming harder to find large plots of land that support single-store, million-square-foot buildings in urban areas. They need to be able to squeeze that much business into a smaller footprint by going vertical. Even in the million-square-foot buildings, they mezzanine them for three levels. So operating multiple levels with low clear heights is not unusual for them. The key point is what Mike sort of mentioned: Any building we do for Amazon or anybody else, we go through a thorough analysis—do we want to own this building in a soft leasing market without Amazon renewing? If the answer is that the building is fungible and divisible, and we can lease it to a normal tenant, we keep it. If the answer is no or maybe, we will sell those. There are buyers in the market looking for those properties with credible tenants especially from Amazon, and we know there's no shortage of capital for that type of asset.

Hey, it's Michael Bilerman. Hamid, Prologis has been a leader in sustainability, certainly within the real estate industry but I would say across all corporations. I guess how do you react to and what’s the impact of the new tariffs and taxes on solar panels? How does that impact your desire to get up to 200 megawatts of self-sustaining power? Is it generally impacting the U.S. or the other countries that you are doing it in? Things like that.

So, Michael, you know there are so many different proposals coming in every morning that we don’t really have the time or ability to react to every single one of them. We will continue to have that commitment, but as I have always said to our people, we don’t do this because it’s trendy; we do it because it's good for our customers and we can make money doing it. Sustainability is a good investment because, in the long-term, the life cycle cost of operating the building is more favorable to our customers, and eventually, that translates to rent. To the extent that tariffs or anything else might change those dynamics, the economics will change, and we will do less in some areas and more in others. Once there are some specific proposals for us to react to, I can provide a clearer answer. But we have never been in the business of saying, okay, we shall have x megawatts of power on our roof, and therefore, we are going to do that whether or not it pencils out. It's always been an economic calculation for us. Michael, I think you were the last question. So thank you again for your interest in Prologis and we look forward to seeing all of you in the next couple of months. All the best. Take care. Happy New Year.