Prologis Inc (PLD) — Q4 2019 Earnings Call Transcript

Thanks, Julianne, and good morning, everyone. Welcome to our fourth quarter 2019 conference call. The supplemental document is available on our IR website on prologis.com. 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. In accordance with Reg G, we have provided a reconciliation to those measures. On October 27, we announced the merger between Prologis and Liberty Property Trust. Materials regarding the transaction are posted on the company's website and are available on the SEC's website. This includes the joint proxy statement containing detailed information about the transaction. This call will focus on our fourth quarter and full year results as well as our 2020 outlook. The company will not provide comments related to this transaction beyond what is included in our prepared remarks. This morning, we'll hear from Tom Olinger, our CFO, who will cover guidance, results and the company's outlook. And also with us today for today's call are Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Colleen McKeown, Ed Nekritz and Gene Reilly. With that, I'll turn the call over to Tom and we'll get started.

Thank you, Tracy. Good morning, everyone, and thank you for joining our call today. The fourth quarter closed out another excellent year. Core FFO was $0.84 per share for the quarter, $3.31 per share for the year. The full year includes a record for net promotes of $0.18 per share. Core FFO, excluding promotes, grew 10% for the year and was more than 2% above our initial guidance. As we enter 2020, market conditions are very good and we've seen no meaningful impact on our business from trade or retailer bankruptcies. Supply chains are increasingly mission-critical to our customers' businesses, which is generating demand as they undergo structural changes to deliver high service levels. We see increased requirements across markets and product categories as more customers seek to strengthen their fulfillment capabilities. Our proprietary customer metrics reflect healthy activity, showing deal gestation and conversion rates are consistent with the third quarter. U.S. market fundamentals remain excellent. I'd like to share Prologis' assessment of supply and demand as data providers use a variety of methodologies, resulting in a range of estimates. Completions in 2019 were 275 million square feet, flat compared with 2018. Higher replacement costs, land scarcity, and the elongated permitting remain governors to supply. Net absorption was 240 million square feet, but limited by historic low market vacancy, which ended the year at 4.6%, up 10 basis points from last quarter and 20 basis points from last year. Market rents in our U.S. portfolio increased by 8% in 2019. We have no new additions to our watch list this quarter, but here is some color on two markets that remain on the list. In Houston, while demand is strong, vacancy is 6.7% and expected to remain elevated, which will constrain near-term rent growth. We have a low role in the IPT and LPT Houston portfolios in 2020. Our near-term outlook for Pennsylvania is more positive, specifically core Lehigh Valley, where demand has accelerated, the supply pipeline has decreased and vacancy declined 140 basis points to 3.2% at year-end. In Europe, activity remains healthy. Rent growth on the continent in 2019 was more than 6%, the highest on record. Fundamentals in Japan continue to improve, with vacancy in Tokyo and Osaka at their lowest point in 5 years and rent growth is accelerating. Turning to operations for the quarter, we leased nearly 38 million square feet with an average term of 73 months. Quarter-end occupancy was flat sequentially at 96.5%, while the U.S. ticked down 30 basis points as our team is focused on pushing rate and term. Rent change on rollover was just under 30% and led by the U.S. at 34%. Our share of cash same-store NOI growth was 4.6% and was impacted by a 60 basis point reduction in average occupancy, again, consistent with our strategy to maximize long-term lease economics. Globally, our in-place to market rent spread increased once again and is now over 15.5% or more than $450 million in annual NOI. Moving to Strategic Capital. 2019 was a record-breaking year. We raised $6.5 billion of equity from 75 new and existing investors and grew our third-party AUM to $38 billion. Our Strategic Capital business delivers a durable revenue stream with 90% of fees coming from long-term or perpetual vehicles, a critical differentiator that is often overlooked and undervalued. For deployment, we had a record year for development starts and stabilizations. We started $2.9 billion in new projects, 43% of which were build-to-suit. Stabilizations were $2.5 billion with an estimated margin of 37% and value creation of $911 million. Additionally, we realized $468 million in development gains in 2019. We continue to have significant investment capacity to self-fund our run rate deployment for the foreseeable future, with over $11 billion of liquidity and potential fund sell-downs as well as an incremental $4.5 billion of third-party investment capacity in our ventures today. For 2020, given we just held our Investor Forum in November, our guidance remains consistent and includes the acquisitions of IPT, which closed on January 8; and Liberty, which we expect to close on February 4. Here the highlights on our share basis, but for complete detail, refer to Page 5 of our supplemental. Our cash same-store NOI growth range is unchanged at 4.25% to 5.25%. And I'd like to highlight 2 points. First, we're increasing our 2020 global market rent forecast by 120 basis points to 4.8%. This increase will have a minimal impact on same-store this year, given our lease expirations, but importantly, will increase our mark-to-market and future NOI growth. And second, the first quarter of 2020 will be up against a tough comp from Q1 of 2019, which benefited from an 80 basis point occupancy uplift. As a result, we expect same-store NOI growth to be lower in the first quarter, but then accelerate in the back half of the year. For Strategic Capital, I expect revenue, excluding promotes, of $350 million to $360 million and net promote income of $115 million. The IPT integration is largely complete and the Liberty closing preparations are on track. We are confident about hitting our Liberty synergy targets on day 1. For dispositions, we now expect a range of $1.3 billion to $1.5 billion, which includes approximately $1 billion of sales from the IPT and Liberty portfolios. When we announced the IPT and Liberty acquisitions, we identified approximately $3.8 billion of combined non-strategic sale on our share basis. Of this balance, $350 million has already closed or is under contract. With the sale of an additional $1 billion in 2020, we will have approximately $2.4 billion of non-strategic assets remaining at the end of the year, representing just 2% of our asset base. These are good assets. We will work through these portfolios in due time, and we don't see a need to hurry. Given our low leverage at 18%, we will dispose of the non-strategic assets at a pace that allows us to match sales proceeds with deployment opportunities. For SG&A, we're forecasting a range between $275 million and $285 million, which includes $6 million to $8 million of one-time transition and wind-down costs related to Liberty. Excluding these costs, annual G&A growth at the midpoint is 2.4%, while managing 15% more real estate. We expect 2020 core FFO to range between $3.67 and $3.75 per share, including $0.15 of net promote income. Year-over-year growth, excluding promotes, is approximately 14% at the midpoint. To wrap up, we expect 2020 to be another exceptional year of growth. We look forward to adding Liberty's high-quality assets to our portfolio and welcoming 35 of their employees to the Prologis team. With that, I'll turn it back to Julianne for your questions.

Just in terms of the rent side of the house, you obviously continue to see very healthy spreads. I think you had previously indicated some of the second half uplift was going to come from the higher percentage of coastal leases rolling here in the U.S. And so as you look at the U.S. here in 2020, is there anything notable in terms of geographic breakdown or just box size breakdown that's creating maybe an outsized opportunity from a rent side and from the increase to the global mark-to-market, the 120 basis points that you mentioned, Tom, how much of that is U.S. versus EU driven?

I'll take the second part of that, Jeremy. The increase in the 120 basis points was primarily due to the U.S., while Continental Europe remained fairly stable. From a mix standpoint, nothing particularly stands out. Things may fluctuate slightly from quarter to quarter, but considering the size of our portfolio, we have a strong distribution across different space sizes and geographies.

Yes, in terms of markets, I mean, you guys can see this reflected in brokerage stats. The vacancy rates will give you a pretty good idea where things are healthy and things aren't. I would say we saw a bit of a slowdown in big box activity during the year in '19, but that actually picked up in that segment later in the year. So if there's anything really new it's that the demand is strengthening a little bit in big box.

Just a follow-on. Do you feel this big box demand could be due to any delta that we've seen with the Phase 1 trade deal completed or Brexit visibility? And how is 2020 leasing velocity feeling to you guys and shaping up from your vantage due to these two events?

Yes. I don't think that the pickup in big box has anything to do with the two geopolitical items you mentioned. And the year is starting off pretty good. We're early in the year, but I'd say we feel a little better than we did a quarter ago. So things that are starting off well.

Just quickly on the clarification. Tom, it sounds like nothing in the underlying assumptions changed here broadly in guidance. But does the improved market rent growth assumption change at all the accretion estimates for IPT or LPT? And then just separately, I know you guys have been aggressively trying to kind of push rents over occupancy. But as you think about kind of revenue management here, is there a lower bound to how far you'd want occupancy to fall here, just given kind of the timing it takes to recoup the lost revenues from downtime?

Craig, I'll address the first part. Regarding the impact of higher rent growth, considering the relatively small remaining share of IPT and LPT portfolios after the acquisition, there won't be much of an impact for 2020. However, as you noted, the key takeaway is that this will enhance our in-place versus market comparison and boost our same-store growth in the future years. Now, I'll let Gene discuss revenue management.

Yes. I'd hesitate to put a lower bound on that, but I would say that in general, this is a good opportunity for us to introduce. We've been 97% range. And as you can see, particularly in the U.S., where we have the strongest market opportunities, we're ticking down and we're very comfortable with that in the sort of mid-96% range. Historically, 95% has sort of been a rule of thumb in this business. I think that may be changing. So rather than get specific, I would just say there's some room to go. We're comfortable pushing harder.

The markets that have higher demand as a percentage of base can tolerate a lower occupancy because it represents fewer periods of lease up in markets that have a lower percentage of growth compared to base need to be more full to have the same equivalent pricing power.

I just wanted to hear a little bit more about what drove the increase in development guidance? And I know you gave the mix on some of the spec versus build-to-suit. But how are you thinking about increasing development right now? And particularly, which markets do you think it's really attractive?

Yes. So let me start with that. So if you look at the health in the markets, as defined by vacancy rates, as I said earlier, that's a good start. We want to focus on markets that are constrained more in the U.S., that's New Jersey, that's Southern California, that's the Bay Area. But it also includes some submarkets, places like Dallas or Chicago. In Continental Europe, there are several places we'd like to be doing more development. But there, you're seeing constraints on supply more significant than really anywhere else in the world.

The increase in starts is due to our improved visibility as we progress through the year. We had insights earlier than usual, so some positive developments occurred that we weren't certain about before. Consequently, the numbers have risen. However, as I've mentioned for many years, acquisition volume tends to be highly predictable, whereas the speculative part of our development volume can be quite volatile. We're not obligated to initiate speculative development, as this relies heavily on real-time market conditions and the supply-demand dynamics in those areas. We will proceed with build-to-suits when we are confident about the demand, but 60% of our starts are speculative. If the market improves, we will increase our activity, and conversely, we'll scale back if conditions are less favorable.

I was hoping you could take kind of a big picture view or provide a big picture view. Maybe reading from the holiday season and just kind of the conversations you're having with tenants, where does it seem like people still need to get their supply chains right, where does it seem like there's still things that aren't going so well? Just as we've been at this for several years now, just how should people think about the runway ahead?

Retail sales and online sales grew by 18%. However, physical store sales have decreased in real terms. This indicates where demand is shifting, with an overall increase in demand. Amazon plays a significant role in this and is becoming increasingly active each year. Moving forward, we expect them to continue this trend, as they account for over 40% of the market. Other competitors are also improving, and we are witnessing a growing demand for e-commerce as we delve deeper into this space. E-commerce remains very robust. On another note, the automotive sector appears to be somewhat weaker than it has been in the past, which is a global trend, while housing is likely to show more strength compared to last year.

So 2019 was the first year where national supply of 1.6% growth outstripped demand of about 1.1%. And there's probably a good degree of nuance in those statistics. For example, in LA, it probably doesn't contribute much to the national demand growth numbers, because you can't absorb what's not available. So when you kind of dig into the numbers, what do you think PLD's exposure is to unfavorable markets where real supply is kind of eating away at the demand?

If you look at our U.S. markets that are showing softness, I would identify Atlanta, Houston, and Pennsylvania as the three key areas. Dallas has been exceptional, experiencing demand far beyond our expectations. These three markets account for about 14% of our total leasing that remains for this year. When considering IPT and LPT, that percentage decreases to 12%. Interestingly, the global portfolio also reflects a 12% figure. Therefore, there is no disproportionate concentration in the weaker markets; they align with our overall market performance, and the percentage is actually decreasing due to the recent acquisitions. I meant to say Central Pennsylvania if I mentioned something else. The weaker markets are consistent with our other leasing, and we have no major concerns regarding them.

Maybe I can go at the development starts guidance question from a different angle. 2019 starts came in at $2.9 billion at your share, which was over $1 billion more than you had guided to at the beginning of 2019. Yet for 2020 and despite the IPT and LPT acquisitions, you're looking at start guidance that's $2.2 billion at your share. So I guess, I'm just wondering how much conservatism is built into that start number? And what are the chances we could end up closer to $3 billion again this year?

That's a great question to consider next year, similar to what you pointed out this year. I can't say for certain. We only pursue development in areas where there's customer demand. Attempting to forecast something would be irresponsible, as it would pressure the organization to meet a specific number, and that's not our goal. Compensation is tied to the success of the company, not to hitting a number. Our focus is on maintaining market balance, ensuring our developments rent well, and achieving good margins. It's all contingent on the situation. Remember, a year ago we were discussing a significant decline in the stock market, which led us to adjust our business plan. The outlook at that time was quite different from how things played out. We were not alone in maintaining a conservative view, which was the sensible approach. However, as the year progressed and we noticed improved demand, we increased our activity accordingly. We have the necessary land and talent to expand, but we won't do so unless there's demand.

We'll always tell you exactly what we think at that moment in time. But particularly with spec development, we will ratchet that down or up as the market tells us. And remember, our development program, it's roughly speaking 200 bets across 65 different markets. So it's big and it's going to be dynamic over time.

Following up on Blaine's question on the developments, obviously, a huge start quarter in the fourth quarter. And back at the Investor Day, Hamid, you had mentioned how the development timeline has extended from 9 to 12 months to kind of 18 months plus. Just given the complexity, due to that and the starts, does that mean you need to carry more land on your books to continue to feed the development pipeline? And if that's the case, kind of where are you looking from a complexity standpoint or a risk standpoint as far as kind of how far out you're willing to go to take risk on land right now?

Yes, if that were the only variable, that would be the right conclusion to draw. However, remember that there are two other factors at play. One is our objective to decrease land as a percentage of our total assets across the company. We're close to achieving that goal but not quite there yet. In some markets, we have limited land availability, while in others we are well-balanced. So that's one challenge we face. Additionally, we're managing a significant amount of land through auctions and other means that are not reflected on the balance sheet. This is how we are addressing the need for more land without increasing our balance sheet exposure. Mike, do you want to add anything to that?

Yes. In terms of our land exposure, I think we're in pretty good shape. We managed that very effectively last year. I think we'll be picking land in our strategic spots going forward in the major markets where our customers are migrating to. I think we're in good shape there.

The expansion in the development cycle is primarily occurring at the front end and on the entitlement side. It is not taking us any longer to physically construct the buildings, and our assumptions for lease-up to achieve stabilization have not been extended. So the focus is really on the front end in terms of entitlement.

Tom, you did a good job at the beginning of the call, I think, laying out some of the supply-demand fundamentals that you guys track, and we all use different numbers. But I think one of the things that had been a little concerning was just kind of no matter what source you use, kind of net absorption before the impact of construction has been kind of trailing a little bit lower. I guess maybe throw a couple of questions at that one. Are you guys seeing that as well? And can you kind of denote where that's coming from, maybe outside of a global auto? And then, two, maybe, Hamid, on your comment about Amazon being 40% of the market, can you just clarify, was that 40% of e-commerce or the embedded base and just kind of what you're getting out of that comment?

Yes, I think the latest number shows that they account for about 45% of e-commerce sales. I might be slightly off, but that’s around the percentage for e-commerce, which is about 12% of the total market. This means they represent roughly 4.5% of overall retail sales. I believe this was mentioned earlier, but I’d like to stress that the demand isn’t uniform across the country. In some areas with exceptional demand, the supply is so tight that a significant amount of that demand doesn’t materialize. I can’t specify that figure, but I know it’s a positive one. After a decade of supply not meeting demand, we’ve been forecasting a year where supply exceeds demand for the past five years, and we are seeing that now. It’s a large market, about 15 billion square feet of base, and there’s a gap of 30 million square feet between supply and demand. This doesn’t even cover all the industrial real estate being converted for better uses and which is becoming outdated. So, I’m not overly concerned about that. Chris, do you have...

Just on the specific numbers, we have net absorption of 240 million in 2019. The 4-year average is 250 million square feet. So pretty consistent with the 4-year average, and really at work there is the 4.6% vacancy rate that just made it more difficult to absorb stock. You saw some of that growth more in price than in net absorption, so rents were up 7%, 8% in the U.S. last year. When we look at the demand trends late in the year, as Gene discussed, whether it's really good momentum in the fourth quarter or whether it's our proprietary indicators, we feel like growth will improve in 2020.

Yes, the outlook going into 2019 was much more negative, or at least not as positive. While it was positive, it was not as positive as it is today. The market feels significantly better now than it did during the call a year ago.

Just a question on development yields. In total, you're developing assets now to 120 basis point spread per this supplemental. I guess at what point do spreads become too narrow to continue developing assets?

When we stop developing, we have to consider our margins carefully. A 120 basis point margin is decent given the current cap rates, but we're very focused on maintaining strong margins. If we can’t achieve around 15% on speculative projects and low teens on build-to-suit, we won't proceed. For a build-to-suit with a top-tier tenant who has great credit, we might accept a 10% margin, but that’s about as low as we would go. Historically, we've enjoyed margins double or triple those figures over the last decade, and while we may encounter lower margins in the future due to market cycles, I believe margins will improve compared to our projections for these deals. We evaluate nearly all our stabilized deals after recapitalizing and assess costs and yields to gauge our performance. Very few of these evaluations show poor results; instead, most reflect strong performance. So far, everything looks promising, and I anticipate that trend to persist in the near future.

I apologize for asking another development question. Based on your fourth quarter starts and a higher development volume in 2020, can you discuss whether you believe overall supply is likely to increase more than it has in the past couple of years? How does that impact market rent growth in general? Additionally, it seems that you are more active in acquiring various types of assets in the New York City boroughs. However, we noticed that Walmart will not be utilizing the Bronx facility you acquired a couple of years ago and leased to them. Could you share your experiences regarding that?

Yes, I think the situation in the Bronx is unrelated to real estate and is rather about Walmart's decision not to continue with a previously intended strategy. We actually view the re-leasing potential for that building as a positive compared to its current lease terms. Additionally, we have Walmart's credit associated with it, so this change is simply about the company's shift in strategy. Regarding the supply situation, we feel more optimistic about it now than we did a couple of quarters ago. Gene, what are your thoughts?

Yes, a quarter ago, we were feeling more negative about supply. Looking at the past couple of years, the development engine in the U.S. hasn't been able to meet Chris' supply estimates. I anticipate that next year will be similar. The reason is straightforward; it is increasingly challenging to develop in this space. I would say the outlook is down.

I believe we all have concerns to some extent. Personally, I would be more concerned about a potential recession triggered by an unpredictable event, like this virus or a global situation that could impact demand rather than supply. Even if supply fluctuates by 10 million, 20 million, or 30 million feet, that won't significantly influence the vacancy rate or pricing power. However, if demand were to drastically decline due to an unforeseen situation, such as a war or another serious issue, that would be my greater concern. Supply, in general, should align closely with our expectations. Over the next year, we have a good understanding of supply because a significant portion of it should already be under construction. Therefore, the real uncertainty lies in the remaining 25% to 30% of supply.

Great. There has been a very impressive 14% year-over-year growth, but what stands out even more is the issuance of 110 million shares, which appears to be around a 25 times forward multiple and a 3.6 implied cap. If you're able to share, could you discuss how, due to FAS 141 accounting, you might be reporting both the IPT and the Liberty portfolio at a significantly higher GAAP cap rate compared to a cash cap rate? Are you able to provide insights on the GAAP cap rate for these assets, as well as your views on FAD growth and dividend growth for 2020?

Yes. I can't discuss the first part, but you can estimate it fairly accurately. The average lease lasts 6 years, and there's an average rent growth of about 3% in these leases. So you can calculate that, with 3 years at 3%, that's how much the gap increases. The reason I won't get in trouble is that I don’t actually know the exact number. However, the calculations should be quite close to my estimate.

And John, I'll refer you back to the presentation we provided when we announced the transaction. We had $25 million in fair value lease adjustments, which also includes straight-line rent adjustments. This is a net number since it excludes the straight-line rent incorporated in the IPT and Liberty portfolios, but more details will come on that. Regarding your point about FAD and its relationship to the dividend, as we have mentioned before, our dividend levels will need to increase in line with our FAD and AFFO growth because we will aim to pay out as close as possible to the minimum threshold we are maintaining. This is a consistent theme that you are observing here.

You talked about, I think, a pickup in demand that you were seeing in Lehigh Valley. I was just wondering if you can give us a little more color on what you see driving that?

Yes. Your question was a little bit low, but I think your question is about recent activity in Lehigh Valley. And Lehigh Valley has, over the past year, experienced a little bit overbuilding, but news in the last 6 months is pretty good. Demand there is strong. I would say that is contrasted with Central Pennsylvania, where demand is still a little bit weak right now.

Yes, Gene, I think driving that is a combination of both general supply chain modernization. So we see some customers who are feeding their store network and also a fair amount of e-commerce also wanting to serve the greater region and in particular New York.

And probably record low vacancy in New Jersey.

Yes. Southern New Jersey, there's virtually no product.

So a key message there would be the prioritization of proximity and the proximity of core Lehigh Valley to New Jersey and in particular New York. That's driving that demand.

I guess, I also have a few more thoughts from earnings this quarter. But one quick question, housekeeping item. Of the $1 billion of sales from IPT and Liberty, how much of that is office? And then second, I think Walmart, just speaking to them, they debut an automation product they're going to be using in their stores to distribute product just directly to consumers via pickup. Can you talk about automation and how that's impacting supply chains? Obviously, Amazon is always trying to reinvent how they're utilizing the fulfillment centers. And maybe you could touch upon how your other customers are thinking about it.

I'm going to pass this over to Chris because he has worked extensively with Will O'Donnell on the topic of automation and its overall impact on logistics demand. You might see a comprehensive paper on this topic in the future. We believe that automation enhances employee productivity since it's challenging to find workers for this type of job. This is the main motivation for adopting automation. However, the challenge is that unless products are highly standardized, the current state of the industry doesn’t allow for specialized or general-purpose automation that can manage a variety of goods with different sizes and shapes. We're making progress in this area, but there's still a long way to go. Additionally, feedback from our customers, especially among third-party logistics providers, indicates that the investment required for automation far exceeds their capacity. To implement automation, they need to secure longer-term contracts with their customers to spread out those investment costs over a longer time frame. Chris?

Yes, spot on. Underlying the variety of operations that are going in our customer space, that translates to two things. One is an adoption rate of automation within logistics facilities that is low and rising at a moderate pace; and two, the ROIs on some of these investments are still pretty low, given the complexity and the complex nature. Another point I'd make relates to productivity-enhancing equipment. That's what this really is. That's been around for a long time, whether you look back 40 years at forklifts. We've seen a constant effort to improve employee productivity within our facilities, and this is no different. As it relates to the specific reference you made, kind of in-store automation as well, something we have seen in the marketplace are more requirements not just to serve e-commerce, but also to serve store fleets that need to handle this "buy online and pick up in store". There's more activity to also think about the existing supply chains to support that activity in store.

Eric, I'll respond to your first question relative to the split out of the $1 billion in sales for IPT and LPT. I would say this, it's going to be fluid. But the office component that remains is quite small. As we said, we're going to match fund disposition proceeds with opportunities to redeploy them. So I would say it would be fluid, but again, the office is a small piece that's left out of that.

Yes, regarding the non-Comcast office, we are past that stage. The office is now under Comcast management. As you may know, it’s a relatively straightforward and flexible situation. The timing of the actions will depend on our relationship with a key customer and how it evolves. However, the financial terms of that deal are fairly fixed; we are aware that it is fully leased and understand the economic implications. So, the office aspect is settled. We aren’t rushing on the industrial side. We have just aligned our funding, being 18% leveraged, so there's no incentive for us to exceed that. We’re not in a hurry as the market conditions are favorable.

Two quick ones. On Slide 15 of the slide deck, you gave the occupancy broken out by its size. Could you give us the rent spreads using that same breakout?

Yes, Vikram, this is Tom. The rent spreads were pretty consistent this quarter across all the different size categories. I think the small space under 100 probably picked up a little bit, a little higher than normal, but this quarter, very consistent across all three sizes.

I would say the small space has recovered somewhat. It was performing significantly better than the big space about a year to a year and a half ago. Then it softened, but now it's showing some signs of recovery. Recently, the big space has been recovering more over the last couple of quarters. While they are now at similar levels, they are each coming from different trends.

It's Michael Bilerman here with Manny. Hamid, I had a question for you just sort of about the acquisition market overall. We clearly know there's an insatiable desire by private capital to put capital to work really on a global basis in industrial, right? It's a favorite asset class, has been that way for the last few years. I wanted to get your kind of thoughts on Sleath's from SEGRO's comments that he made earlier this year that the market is paying full price even for assets with works on them and that their focus is on development and granted it was self-serving. But you made a comment about the acquisition market. I sort of wanted to get your feel about what you see on a global basis about how investors are pricing assets and differentiating assets and how that may play into your disposition plans as well?

Yes. I mean we've basically been saying the same thing, more or less, with a slightly different accent. The acquisition market in Europe, which is, remember, that's what they're talking about, is pretty expensive. If you have a good land bank and you are an active developer, like they are and we are, the best use of capital is to put your land bank to work, and the incremental returns on those investments are quite high. But there are still opportunities here and there that are priced below replacement cost. For example, short-term income in Europe is discounted. If you have a building that has a two-year lease on it or something, maybe a perfectly good building, but you could buy that below replacement cost, that kind of thing we'd be interested in. But you can buy $1 billion of it. I mean, I don't know where you would go to buy $1 billion of that kind of stuff in Europe. The rest of the world is a different story. In Mexico, if an acquisition opportunity were to come up, cap rates for the very best product are around 7, but you can buy some things that are 8 or 9. If you look at their treasuries, the goal on their treasuries, there's a big spread there in that market. The global picture is a little different, but I would generally agree with their commentary for Europe. Gene?

Yes, I wouldn't add much to that. And Europe, while expensive on a relative basis, look at risk-free yields in Europe. I mean, you get negative rates and the best economies, there are probably four countries in negative rates. I'm not frankly sure that cap rate environment today in Europe is all that expensive.

Europe has a lot of institutional investors focused on it, and the industrial asset class in Europe is still relatively new, with a smaller amount of institutional quality products compared to the U.S. This creates a situation where there is significant private capital targeting a market with limited opportunities, which is likely impacting yields in Europe. Consequently, development is favored over acquisitions in these markets. Thank you for joining our call, and we look forward to speaking with you next quarter, if not sooner. Take care.