Prologis Inc (PLD) — Q4 2018 Earnings Call Transcript

Thanks, Kim, and good morning everyone. Welcome to our fourth quarter 2018 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 reconciliation to those measures. This morning, we'll hear from Hamid Moghadam, our Chairman and CEO, who will comment on the company's outlook. Then Tom Olinger, our CFO, who will cover results and guidance; Gary Anderson, Chris Caton, Mike Curless, Ed Nekritz, Gene Reilly, and Colleen McKeown are also here with us today. And with that, I'll turn the call over to Hamid.

Good morning, everyone, and thank you for joining us. We had a great fourth quarter, concluding our strongest year ever, and Tom will discuss the details later. I want to address the key issues that are likely on your minds, specifically the latest data, feedback from our customers, and the measures we are taking to navigate this period of increased uncertainty. Firstly, our forward-looking operating metrics, such as average deal gestation periods and lease conversion rates, are stable. We signed 17 million square feet of leases in December and the first 20 days of January, which is typically the slowest time of the year. Our data indicates strong customer interest, and we expect sustained activity as our dynamic customers enhance their logistics networks. Although we haven't observed any decline in the slower-growing segments, it’s possible that some users may pause until they gain more clarity on economic trends. Regarding what this implies, our perspective isn’t more insightful than anyone else's; we’re dealing with a complex situation where the market volatility is entirely self-inflicted and resists straightforward analysis. If the government resolves its shutdown and the trade tensions with China are quickly addressed, the market could rebound quickly on its previous strong path. Confidence serves as the most effective and economical form of stimulus. So, what steps are we taking? With our $14 billion non-strategic disposition program completed, our portfolio now concentrates on high-quality properties in prime markets. Our balance sheet is among the strongest in the REIT sector, and we have significant investment capacity. Essentially, we have already laid the groundwork to navigate various market cycles. Additionally, the fundamentals of property remain solid, with historically low vacancy rates, high utilization, limited new supply, no shadow space, and e-commerce providing ongoing support to the logistics sector. We have implemented several more measures in response to the heightened risk of capital market fluctuations. First, we are more selective with new speculative development projects. Second, we are closely tracking our forward-looking indicators daily and maintaining active conversations with customers to gauge any shifts in market sentiment. Third, we have adjusted our 2019 business plan and guidance to reflect the increased risks in the environment. It is crucial to note that we are not seeing any signs of weakness in the market, but to overlook the recent volatility would be irresponsible. We are not signaling a turning point in the economy; our goal is to be prudent in managing our business. Looking back, I see similarities to the dot-com era. In the two years after the market peak in March 2000, the Nasdaq lost two-thirds of its value, while the S&P 500 increased by 20% and REITs rose nearly 60%. We are not naïve enough to believe we can predict the market, but there are striking parallels between now and then. Although today's tech leaders are legitimate companies generating real profits, many unicorns rely heavily on the availability of inexpensive risk capital for survival. History may not repeat itself, but it often displays similar patterns. I believe that well-managed REITs will prosper once again due to their defensive traits and appealing risk-adjusted yields. With that, I’ll turn it over to Tom.

Thanks Hamid. I’ll cover highlights for the fourth quarter and introduce 2019 guidance. We had an outstanding year and quarter. Core FFO per share was $3.03 for the year, which included $0.14 of net promote income and $0.80 for the quarter, including $0.05 of promotes. Global occupancy at year-end held steady at 97.5%, while the U.S. ticked down 20 basis points as we continue to push rates and term. Our share of net effective rent change on rollovers in the quarter was an all-time high at 25.6%, with the U.S. at over 33%. We leased 35 million square feet in the quarter, with an average term of 83 months, also a record high. The spread between our in-place leases and market rents was extended modestly to more than 15%, driven primarily by Europe, where we now estimate our leases to be approximately 11% below market. Our share of cash same-store NOI growth was 4.5% for the quarter. Given the longer lease trends this quarter, we had more nominal pre-rents, which had a 50 basis points drag on cash same-store. It's important to note that pre-rents, as a percentage of lease value, declined sequentially by 20 basis points to 3.7%. 2018 was also a good year for our strategic capital business. Investor demand remains strong for well-located logistics real estate. We raised $2.2 billion in new capital and grew our third-party AUM to more than $35 billion. Our strategic capital business continues to deliver a durable revenue stream, with over 90% of fees coming from perpetual or very long-life vehicles. On the deployment front, we had an active year and created significant value for our shareholders. Development stabilizations were approximately $1.9 billion with an estimated margin of over 35% and value creation of $661 million. The $1.1 billion of asset sales in the quarter marks the completion of our multi-year non-strategic disposition program. Turning to capital markets, our balance sheet remains one of the best in the business; our credit metrics are extremely strong, and we continue to access capital globally at attractive terms. We have minimal refinancing risk as more than 75% of our debt is denominated in foreign currencies where base rates are near or at historic lows. And with the recast of our global line of credit, we now have liquidity of over $4 billion and more than $6.5 billion from potential fund rebalancing. We can self-fund our run-rate deployment for the foreseeable future. Now for 2019 guidance which I'll provide on an our share basis. As Hamid mentioned, the volatility in the capital markets and the related self-inflicted political paralysis are bound to affect consumer and business confidence. We revised our outlook and corresponding guidance in response to this ongoing uncertainty. Clearly, there's upside toward guidance should these issues be resolved. We expect cash same-store NOI growth between 3.75% and 4.75%, and period-ending occupancy to range between 96% to 97.5%. For strategic capital, we expect revenue excluding promotes of $300 million to $310 million and net promote income of $0.10 per share, which is based on today's real estate values and FX rates. Consistent with prior years, there will be timing differences between the recognition of promote revenue and its related expenses. We expect to recognize the majority of the promote revenue in the third quarter and incur $0.01 of promote expense in each quarter of 2019. We have reduced development starts from 2018 levels and expect a range between $1.6 billion and $2 billion. Build-to-suits will comprise more than 30% of this volume. Dispositions will raise between $500 million and $800 million, well below our $2 billion run rate over the last several years. Contributions are expected to range between $1 billion and $1.3 billion, which includes the formation of our Brazil venture that closed last week. Our share of net deployment uses at the midpoint is $400 million, which we plan to fund through a combination of free cash flow, modest leverage, and potential fund sell-downs. There is a timing lag to reinvest our significant deployment proceeds back into development, which will reduce first-quarter core FFO by approximately $0.02. For SG&A, we're forecasting a range between $240 million and $250 million, representing year-over-year growth of 2.5% at this point, while managing 18% more real estate. Putting this all together, we expect 2019 core FFO to range between $3.12 and $3.20 per share, which includes $0.10 of net promote income. Our guidance reflects the impact of the new lease accounting standard. For year-over-year comparison, our 2018 results reflected $0.04 of internal capitalized leasing costs. As the midpoint, core FFO growth excluding promotes is almost 7.5%. To put this growth in the context, the three-year plan we provided at our Investor Day in November 2016 called for 7% to 8% annual growth excluding promotes. At the midpoint of our 2019 guidance, we'll have averaged 8.7% for this three-year period, outpacing our high REIT expectations. To wrap up, we had an excellent quarter and year. While we remain on the lookout for signs of market weakness, we feel great about our business and are extremely confident in our ability to outperform. With that, I'll turn it over to Kim for your questions.

If any slowdown should occur, where should we expect that first? Is there a geographic tilt to that? Or is it the amount of pace that it's looking for? Or the rents or type of tenants? Any color around that?

I think it's likely to be a demand-driven problem, because any change in situation is not likely to come from the supply side; there is a lot of visibility on supply for the next 12 months. So it's really the demand side. Where you would see it is obviously on leasing volumes and rent change on leasing and the like, probably not in same-store because that takes a while and it's very occupancy-driven. We're trying to drive down occupancy, so you see the rent change and leasing volumes and all that. Where we would see it a bit earlier than you are some of those forward-looking indicators like traffic through our buildings, like how long it takes to make a deal, like the conversion rate of showings to actual leasing activity and all that. So we see those on a daily basis literally. I can tell you what happens at the end of today. Those are the forward indicators that I was referring to.

Hamid, I was wondering if you can spend a little bit of time talking about development starts. And I think one of the comments you talked about is trying to be conservative in managing the land bank and managing starts. As we think about 2018, you've put out a range with the midpoint of $1.8 billion in terms of starts, which is down about 30% from the $2.5 billion you did late this year and certainly lower than the guidance you came into as well in 2018. So how much of that is a demand side versus a yield expectation side that's dropping that you don't want to play in? And maybe you can talk about those, or how much of it's just purely don't have the land bank to support a larger pipeline? Maybe you can help with the context?

First of all, if you look at our development guidance, there is build-to-suit and there is spec. On the build-to-suit front, we have assumed a small fall-off rate. But essentially, the build-to-suit activity that we have, and we know, we have great visibility on. On the specs, we've reduced the starts by maybe 40%-45%, only because why get off in front of the skies? Last year was the biggest development start number that we had in a decade. I remember way back when people kept always looking for higher and higher development guidance. I mentioned three or four years ago, maybe five years ago now that our development is going to raise between $2 billion and $3 billion a year. Last year, we exceeded that, and this is gross numbers not our share; our share numbers are smaller. But at this point in the cycle, why project more spec development than you have visibility for? So, as you know, we're building mostly in parks and we're building off in that sixth or seventh building in the park. We usually have a couple of patches ready to go. So if we're wrong about market demand and strength of the market, we'll just continue at a higher level of spec development where we totally control that, so there's no point counting on that and getting expectations to that level. It's certainly not because of lack of land bank, because while we pruned our land bank significantly, our land is really good and developable and entitled. It's certainly not because we're not getting the yields. I mean, you've seen us now for five years project yields in the teens and we end up in the 20s and 30s. The land bank provides for almost $11 billion of build-out if we were to build all of it. So, we got capacity for many years of development, feel good about that, and are not going to be afraid to put that capacity to good use in terms of additional starts as we watch the year unfold.

Could you elaborate on the recent changes you made to the guidance? It seems that you've lowered your projections in the past few weeks. Can you explain where those reductions occurred and how cautious this new figure is? What would need to happen for you to fall short of this projection?

Well, the second part of that or the last part of that is really hard to answer. Obviously, as the world falls off the cliff, so there's always downside to any scenario. But there's certainly less downside in this scenario than it would have been in our original plan. I would say we tweaked our plan in a couple of general areas and Tom can get into the specifics. But we moderated rental growth this year. We are on a glide path to stabilize occupancy of 95%, which is the norm in our business. We've got there. We accelerated the glide path down to that. We cranked up our credit loss a little bit, and we obviously reduced the development guidance or development expectations for the year going forward. Those are the big parts of it. Tom, do you want to…

So on rent growth, we tempered that by about 200 basis points. So for global, our share rent growth in '19 will be in the mid-3s. Same-store NOI, we talked about that’s down about 50 basis points driven by lower average occupancies, lower market rent growth, and a little bit of bad debt if you need mentioned starts. We talked about core FFO down about $0.05%, a combination of about $0.02 from same-store and NOI, about $0.02 from lower deployment and a slower pace of deployment, and about $0.01 from lower fees just related to lower transaction volume.

In terms of the guidance for occupancy declining this year, would you break down the drivers of that impact between on the one hand your strategy of pushing rents more at the expense of occupancy versus whether there is a bigger impact from supply-demand imbalance or even some of your conservatism on demand because of a weaker economy?

There is no supply-demand imbalance. Even last year in 2018, much to our surprise, demand exceeded supply. Now, we've been sitting here telling you for four or five years that one of these days the supply will exceed demand by a little bit here, and we're going to say that again this year. We've been wrong in the last four or five years. But even if demand falls short of supply, with an effective vacancy rate in the market of the high 4% range, even if there's a 50 million square foot shortfall between supply and demand, it won't move vacancy rates by more than 10 or 15 basis points. So I don’t think it's those things. It's just that we are trying to maintain pricing power and push rents. Frankly, as the market has spoken, our occupancy levels have not budged; in fact, they've moved in the wrong direction. It is our stated objective not to run so full, particularly when you look at the underlying utilization of these buildings. It's not only that vacancy rates are low, it's also utilizations are really high. So every indication we have is that our customers need more space, and they're really tied, but we do want to drive pricing. So you might criticize us by saying why do you reduce your rent growth forecast if you’re pushing for more rent and reducing occupancy levels? My answer to that would be, we’re trying to be prudent in this environment, things move around quite a bit. If we turn out to be overly prudent during the year, we always have the opportunity to adjust that in subsequent quarters when we feel it's necessary.

I wanted to get into the mix between development yields and the weaker global growth environment that has you guys prudent. When I look at the 6.2% fourth quarter development yields, certainly a bit lower than full year '18 at the 6.5% level. So is this the new norm for 2019 in the lower yield environment, and is due to construction costs? Can you share some of this cost impact on new development and how those pressures break down, I guess between labor and materials? Thank you.

So I wouldn’t read too much into the lower yields; it's partly mix and it's partly obviously we moderated our rental growth, so whatever we had in the mix before, it's going to be a little bit lower because of that moderated rental growth but it's still very profitable development. As you can see, we keep guiding to built-to-suit margins in the 12% range, and the spec margins in the 15% range. Every year, we have come out ahead of that by 500 to 1,000 basis points of margin, maybe some more in prior years. Look, I don’t know what it's going to be, we’re going to find out what it is, but we feel pretty good about there being profitable, ample profitable development opportunities. Again, as I said in response to the previous question on development, it's not like we’re reducing our guidance because we don’t think we can get the margins. If the market holds up anywhere near where it has been, I think we’ll get really good margins.

Hamid, you mentioned during your opening remarks that you have raised the standards for new speculative starts. Could you provide more detail on what changes you made, possibly regarding yield expectations? Also, Tom, in response to Jamie’s question, could you clarify where cash same-store was prior to the adjustments you made? I believe I heard it was 50 basis points.

Tom, go ahead and answer that and then I'll…

So Craig, yes, cash same-store was down 50 basis points based on our assessment of the market volatility versus our original plan.

And I thought I answered the first part of the question but if you want to ask the different way, maybe I can see the nuance in it.

I apologize if I didn’t hear you. I just wanted to understand what exactly you're adjusting for; are you increasing the yield bar for new starts or is it something else?

No…

So the underwriting is…

No, it isn't. What we discussed was looking at our built to suit loan yields and adjusting that by 15%. We also considered what could happen to our speculative volume and adjusted that by 45%. We analyzed those figures, and that led us to our conclusions. It wasn't a detailed bottom-up approach for each deal regarding speculative starts; that method was applied to the built to suits. However, by nature, speculative starts don't follow that bottom-up process.

I just want to focus on the rent growth comments. I know you've just tempered expectations more just to be conservative. But can you give us some color on what you're baking in for coastal maybe versus other markets? In the past, you've talked about high-single-digits in coastal and mid in others. And then are there a couple of markets you can call out where you're maybe seeing some turn in fundamentals that's driving this any market specifically?

The short answer to the question is that coastal is more like 4, 4 plus, and in land is more like 2, 2 plus. But there's a lot of variability even in those numbers and we have a very detailed market-by-market analysis of rent. We forecast rents market-by-market and we update our forecasts a couple of times a year.

Two questions from me. The first, I just want to go back to the supply conversation, just given some of the rising costs and just the overall limited amount of quality intra-land sites that are out there. I'm wondering if you can comment on how much of new supply being built today is really just not competitive or a threat to your U.S. portfolio just given all the repositioning you've done at this point. And then the second one is one for Tom just on guidance. I just have the DCT portfolio under roof for a few months now. I think originally you're expecting about $0.07 of accretion in 2019 from that. Can you just talk about how it's trending and do you still feel like that's the appropriate amount?

Jeremy, I'll go first on that. The accretion in '19 is more like $0.05, because in '18 we had $0.07 annualized. So we got $0.02 plus of that in 2018. So the real incremental increase in '19 is $0.05. But all our expectations, as we said, we hit all of our day one synergies way back in Q3; everything is going, I would say overall better than plan.

There are some markets that have experienced excessive supply in recent months. In particular, we've seen significant increases in starts in Chicago, which we are monitoring closely. We have concerns about supply in Atlanta, Houston, and Central PA. If we were to consider international markets, I would include Madrid and Osaka as well. On a more positive note, our outlook for Dallas has improved since a few months ago, indicating that the situation there is stabilizing. These numbers may fluctuate, but they are likely to show more significant movement in markets that are not facing supply constraints.

Tom, can you provide some color on what your bad debt assumptions are for 2019, and are you seeing any specific tenants that you consider in the portfolio? I know last quarter I think you highlighted there is roughly 30 basis points of revenue that you would say that that’s at risk. Or is it more of just the uncertain macro conditions and that's why you increased those assumptions a little bit?

It's the latter. Bad debts have been trending at historic lows of around 20 basis points of revenue over the past several years. We expect that number to be closer to 50 basis points over the long term. We are confident in our credit quality. Our exposure to total tenants is quite small. In our budgeting, we have factored in an increase in bad debt expenses toward historic norms rather than staying at the lowest point. However, I remain positive about our credit quality and our exposure. This is just a cautious approach, as Hamid mentioned.

Just sticking with development here, your guidance for 2019, it looks like stabilizations are going to outpace new starts by roughly $250 million, which makes sense considering you did $1.4 billion of starts in the fourth quarter. But if we look at 2017 and 2018 combined, the starts outpaced stabilizations by nearly $900 million. So all else being equal, I would assume the amount of stabilizations would be even greater in 2019 than what we're looking at. Are the new developments that you're starting taking longer to construct or stabilize, or are there other factors that account for this lag in the stabilization?

I'll go first; this is Tom Olinger. I think when you look at '17 and '18, particularly '18, we had a lot of starts in the back half of the year, particularly Q4. And then I throw a little bit of mix in there. But from a stabilization standpoint, we are stabilizing assets generally, I would say, across the board consistently ahead of underwriting, number one. And number two, I think you're going to see a lot of stabilized NOI come in 2020 and that's going to be when that really unwinds. When you think about, particularly overseas where we're building multi-story, if that takes longer to go, so that has to be factored in; that’s part of the mix component. But we’re leasing up; you can see in our development pipeline we’re leasing up at good rates or at a good pace, I would say, ahead of where we thought we’d be. Rents are higher than we thought they would be; margins are higher than we underwrote; so I feel really good about all that.

So the only thing I would add is just underline something Tom said, which I think is generally misunderstood. 2020 is a huge year for incremental return out of development stabilizations; that volume we've already paid for. The only lift we've gotten to our income statement is through capitalized interest, which is a very low number. Those yields will convert to sort of the 6 plus yield given the volume. It doesn't take a lot of math to figure out that 2020 is going to be a really, really good year in terms of growth coming from the lease up of the outlook pipeline. But we're not going to guide to 2020, so don't even go there.

Thank you. I noticed that your leasing terms this quarter averaged about 83 months, while they have typically been around 60 months for the past several quarters. Is this change due to a mix of factors, such as Prologis encouraging longer lease terms or customers seeking them? Also, do these contracts include any notable differences in terms of free rent or escalators? Is there anything we should take from that?

Yes, John, this is Gene. I'll take that one. There is a bit of mix because the development lease terms are actually 148 months during the quarter, but the operating portfolio was 71 months. So that's increasing, but at quite the pace you'll see with 83. I also want to warn everybody, this is volatile quarter to quarter. We have been pushing term really high, it’s good to see it going in the right direction. You're probably not going to see an 83 next quarter, but sort of that trailing average should be changing up.

Thank you. Just a quick question on the fund management business. Maybe you guys can just give a sense of what the investor outlook is like for logistics at this point in terms of how much you can grow your AUM, if you wanted to, and whether you have the appetite to do so? And then, if a trade war with China really does escalate and we put tariffs on all their imported goods, do you have a sense of what geographic markets in the U.S. will get impacted the most by that?

So, let me take a stab at the second one. If you think about most of our U.S. markets, the vast majority of demand comes from consumption of the population in those markets. Now, there are a couple of markets like LA and New Jersey where you have an incremental flow-through coming from imports, so those would slow more than the ones that are just consumption markets because the location of where goods are coming from will change on the margin. But those things take actually a lot longer than most people think, and the currency effect is usually also mitigating some of the tariffs. But you would think those markets on the coast would be impacted a little bit. Chicago is an inland port, so I would throw that one in there too. So, what was the first part of your question, Eric?

Fund management...

Fund management is very strong. Our cues could be a lot longer if we weren't concerned about the amount of time that it would take for investors to get their capital invested. There's no sense raising a lot more money if we can't invest it. So, the sector seems to be defying gravity in terms of investor demand, pretty much everywhere.

Yes, good morning out there. Tom, I wanted to follow up on the 3.5% market rate growth. Can you give that by Asia, Europe, and the U.S. just kind of a broad stroke? And what you’re expecting for ’19? And then maybe Hamid, or Gary weigh in on where your rent growth has been in Europe, cap rate trends just over the last couple of months with some of the uncertainty and what you might be seeing post the Brexit vote and the China slowdown?

Hey, Mike, at this point we won’t breakout the different components of global. Our shares, it's in the mid-3s as I said, and it's down about 200 basis points from our original expectations.

With respect to market rent growth, I mean, Europe has been sort of in the 5% range plus or minus, and we do expect it to be greater than the U.S. in 2019. We have tempered our view slightly with respect to next year; downward in terms of market rent growth, but still sort of in the mid-4s.

Great, you guys have making it look easy, aren’t you? Your office brethren right now is suffering from a really difficult cost to capital; you guys don’t seem to have that problem. But when you’re looking at your cost to capital, how are you analyzing your open-end fund business versus your common stock price? And at what point in time does it make sense to really push the fund business versus common equity or to just not even look at that way?

First of all, regarding common equity, I believe we are the only company in this sector that hasn’t raised any equity. While you could consider issuing equity to acquire DCT as a form of equity raise, we haven't raised equity in 2018 or at any other time recently. Our perspective is that we operate under a self-funding model, which we are very committed to. As demonstrated, we are currently overinvested in most of our funds. Consequently, there is considerable demand from those looking to increase their investment in our fund. We have about ten years of capital from those sources based on our typical run rate, excluding M&A. Thus, our stance on raising equity is straightforward; we do not plan to raise equity and do not foresee a need to do so in the near future. Regarding our private capital business, this is very important. I want to emphasize again, John, that over the years you and I have worked together, we do not regard this as a separate business; it is integral to our operations, as our capital is invested there. We do not separate lower yield deals in our private capital vehicles from our stronger deals on our balance sheet. We consider all business equally. Presently, I estimate the cost of capital to be in the mid to high sixes, nearing seven in total. Given an inflation rate of around 2% and leverage around 25% to 30%, that represents an appropriate risk-adjusted return considering the asset class's volatility. I don’t perceive much distinction between the public and private sectors, as they generally trade in alignment. The private sector might be slightly more richly valued compared to the public sector, but the disparity is reasonable, within about 5%. While differences in sectors can be more pronounced, this may be due to varying growth expectations. We attempt to apply caps to everything, but we aren't very adept at reflecting different growth rates. Therefore, if you evaluate on an internal rate of return risk basis, they are likely very similar across sectors.

Hamid, it definitely sounds like there’s a built-in prudence to how you've gone about forecasting for this year, given a lot of macro uncertainty. A lot of the data and the stats support robustness. And I think you talked about in your opening comments how your discussions with tenants have indicated continued robust demand. So I'm wondering if you can sort of draw parallels to what your tenants are telling you relative to the conservativeness or the prudence that you are taking in your forward expectations and maybe a mismatch that could be there?

Okay. You know, at the end of the day, I don't think our customers really know that much more than we do. Everybody is guessing as to what the implications of this last 15 days of weirdness are going to be. I think basically what we're hearing from our customers is that they were going pretty much with very strong business plans through the end of the year. Their companies probably haven't had their earnings call yet, so we'll see what they say on those calls. But as far as the real estate department and procuring capacities are concerned, they haven't gotten the memo that the business is slowing. They may in a couple of months, but they haven't gotten it yet.

I wanted your thoughts on some of the consolidation we're seeing in this 3PL industry. Just kind of how do you say, if we continue to see as how do you think this impacts tenant demand and your business over time?

I think it's good to have more profitable, more consolidated larger customers. It is an extremely fragmented business. We don't think the level of concentration, if it's even continued for a long time, is really going to change the dynamic, the landlord-tenant dynamic because it's still going to be a very fragmented business. But I would rather have, it's little, the masses have to little from point A to B. The consolidation doesn't do anything about how much the boxes need to move. It's just that this is more profitable and moving those boxes around to more, better capitalized, profitable customers, we prefer that. So I think some pricing discipline coming into that business in terms of how they price their services is all good.

Thank you for taking a question, a quick question on your utilization. So, your last BI report says, it's around 87%, 86.5%. I'm assuming it's pretty much the same based on your comments. I was just trying to wonder whether you could comment on the range of that distribution, and if the median has shifted higher or lower year-over-year just trying to get a sense of the skewness?

So, that's above my pay grade, and Chris Caton will answer that.

Yes, hey, Sumit, thanks for the question. As you've seen in reports, the historical utilization rate can range between 82% and 87%, and we're right bang on at the peak of that over the last 12 months. So utilization is running at peak levels.

Thank you. Just a quick follow up. Hamid, I know we've talked about maybe a few quarters ago, just one, the trade wars talk really starts to accelerate. Just kind of how stuck companies were in their supply chain. Has there been any talk of anything different in terms of changing their manufacturing origination in terms of how their goods are moving?

Not that I can tell and certainly not that supported by the data because notwithstanding all this talk. I think the deficit from China was at record levels last time it was recorded. I don't know if that's because of the lag between the action and anticipation of people doing more volume prior to any tariffs taking place; I don't know. But we haven't seen any evidence of that. I think the macro point I can make is that generally, people are shifting more production to Mexico in terms of manufacturing, but we were having the same exact conversation about Mexico a year and a half ago. These things can move around faster than people can react.

Thanks. Just wanted to get a little commentary on asset pricing here; it seems as though we've seen cap rates holding steady or even continuing to decrease in the infill and coastal markets. But I'm wondering if you're seeing any markets out there, especially in the U.S., where maybe there has been an inflection and you're seeing cap rates increase at all?

I have to say that in our recent upscale transactions, we were truly impressed by the interest in those portfolios. If these deals go through, it will be very beneficial for our NAV.

Good morning. Just wanted to ask quickly on institutional capital demand in Brazil given the recent JV you guys announced and the elections that happened about 13 months ago. At this point?

So this is Gene. You're talking about sort of general institutional demand; we may not be the best people to ask, but it is a business environment that has a lot of optimism right now. The new President is certainly business-friendly, and we've certainly seen a lot more demand from customer activity down there. And obviously, we did recently sign a very big JV. But as far as broadly speaking, my guess is that there is a more institutional demand at this point given the political changes.

Being that that was the last question, let me just add one more comment that I found the most interesting. Probably, the most interesting statistics that I've seen about the timing is something called the global economic policy uncertainty index that I actually saw a couple of weeks ago. It's a scale we're spending more time trying to understand that, but it's a tale of the degree of policy uncertainty around the world. Let me give you a couple of points. During the 9/11 attacks and the Iraq war breaking out, that index was at 200. At the peak of the global financial crisis, it was at 210; and Brexit, it got to 300. Given the China war and the government shutdown, it's well north of 300. Now, I have no idea whether there is any academic rigor or anything related to this index, but I just found it fascinating that the world thinks we’re in a much less certain environment. Now, uncertainty is usually viewed as bad; it can be bad or good because we saw how quickly the Mexico stuff turned around. The reason that we've taken the position that we have this quarter is exactly because we're living in this kind of world. And as I said before, don't read too much into this; we need to stay tuned, be vigilant, and really keep a sharp eye on what customers are saying and doing, and I think we’re going to have a business that's just fine. Thank you for your interest and look forward to talking to all of you soon.