Prologis Inc (PLD) — Q4 2020 Earnings Call Transcript

Thanks, Amy. And good morning everyone. Welcome to our fourth quarter 2020 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations. I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA, that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures. This morning, we'll hear from Tom Olinger, our CFO, who will cover results and real-time market conditions as well as guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Dan Letter, Ed Nekritz, Gene Reilly, and Colleen McEwan are also here with us today. With that, I'll turn the call over to Tom. Tom, will you please begin.

Thank you, Tracy. Good morning everyone and thank you for joining our call today. I want to begin by acknowledging our team and their great work this past year. In an incredibly challenging year, our accomplishments were significant and possible because of the work we've done over the last 10 years building the best-in-class portfolio that is critical to today's supply chain and centered on our customers. During the year, we closed on $17 billion of M&A, further fortified our balance sheet with lower rates in line with maturities, generated over $1.1 billion of free cash flow after dividends, and importantly, continue to deliver sector-leading earnings growth. Since the merger in 2011, our earnings CAGR of 9.5% without promotes has outperformed the other logistics REITs by more than 350 basis points annually. This is the result of our unique business model which has consistently outperformed year after year. Turning to our view of the operating environment. Our proprietary data shows that the strong demand we experienced in the third quarter has continued, globally leases signed in the fourth quarter were a record 65 million square feet or more than 1 million square feet per business day. This was driven by new leasing, which rose 22% year-over-year on a size-adjusted basis. A broad range of customers signed new leases in the fourth quarter led by consumer products, food and beverage, electronics, and health care segments. E-commerce activity accounted for 19.8% of new leasing. The need for speed and flexibility is also reflected in elevated short-term leasing which was up 58% in the quarter as 3PL, retail, and transportation customers raced to secure space ahead of the holidays. Lease proposals remain at healthy levels. In the U.S., fourth quarter net absorption was the highest on record at 100 million square feet, in excess of new supply of 90 million square feet. Rents in our markets grew by 3.2%, with all the growth coming in the back half of 2020. We anticipate rents to grow by approximately 5% in 2021. Houston is the only U.S. market on our watch list. As a reminder, we moved Atlanta and Central Pennsylvania from our list in the second quarter. In 2021, we expect supply to decline year-on-year balanced with demand at 280 million square feet each. Conditions are also healthy in our other markets across the globe. In Europe, rents began to rise in the fourth quarter and we expect 2.5% of additional growth in 2021, led by Northern Europe and the U.K. The implications of Brexit have been largely positive for us as we anticipated four years ago when Brexit was first announced. Inventory disaggregation will eventually lead to higher inventory levels in both the U.K. and the continent. We're watching new supply in Poland and Spain, but for context, these two markets account for just 1.7% of our share of NOI. In Tokyo and Osaka, historic high levels of supply are being met with very strong demand. Over two-thirds of the development pipeline is already pre-leased and we expect market vacancies to remain below 2%. For China, supply is moderating even as the market remains soft. In our portfolio, we leased a record 10 million square feet in the second half of the year, a credit to the great work of our new China leadership team. Turning to valuations. Our logistics portfolio posted the largest sequential increase in a decade, rising 5% in the U.S. and globally, and are now nearly 6% above pre-pandemic levels. Applying this increase to our $142 billion owned and managed portfolio, we estimate the value of our real estate rose by $7 billion in the fourth quarter. We expect continued fundamental improvement in 2021 and beyond, based on three drivers. First, robust economic recovery including the highest GDP growth in the U.S. in more than two decades. The combination of corporate and personal savings, as well as significant governmental stimulus, is a loaded spring which will translate to significant economic growth in the back half as the vaccines continue to roll out. Second, the pandemic accelerates the retail revolution. The e-commerce penetration rate jumped 480 basis points to 20% of goods sold in the U.S. in 2020. Based on early reports, e-commerce holiday sales grew by at least 30%. While we expect the share of goods purchased online to grow further, a pause later this year would not surprise us, as consumers expand spending on services and experiences over goods. Our customers continue to plan for a long term, retooling supply chains for increased demand that should generate a cumulative incremental demand of 200 million square feet or more over the next several years. Third, we expect higher inventory levels. Inventory to sales ratios remain near all-time lows. We believe that's had an impact on our customer space utilization as it ticked down to 83% in the fourth quarter. We see early signs of inventory restocking as containerized import volumes in the U.S. rose 24% in November and are on pace to set a quarterly record. Longer term, the need for more resilient supply chains will lead to higher inventory levels. We estimate that a 5% increase in inventory levels will produce incremental demand of nearly 300 million square feet in the U.S. alone. These changes will take years to play out, driving strong long-term demand. Turning to results, the work we've done to create the best-in-class portfolio, scale, and lowest cost structure in the industry is delivering exceptional financial results. Core FFO excluding promotes grew by 14% and came in at the high end of our range at $3.58 per share. We also recognized record net promote income of $0.22 per share. Net effective rent change on rollover in the fourth quarter was 28% led by the U.S. at 32.1%, both high watermarks for the year. Our in-place to market rent spread now stands at 12.8%, up about 60 basis points sequentially. Collections continue to outpace 2019 levels and as of this morning, we collected over 99% of fourth quarter rents and over 95% of January. Bad debt was 42 basis points for the quarter and 43 basis points for the year, both below our expectation. Our share of cash same-store NOI growth was 3% and led by the U.S. at 3.5%. We made meaningful progress on the sale of non-strategic assets acquired from Liberty. We settled all disputes related to the construction of the Philadelphia Four Seasons Hotel and the Comcast Technology Center. We completed the disposition of our 20% ownership interest in the hotel and the previously announced portfolio in the U.K. To date, we have sold more than $600 million of former Liberty assets, exceeding our underwritten value by more than 80%. We now have less than $400 million of former Liberty non-logistics assets remaining, consisting primarily of our interest in the Comcast headquarters. For strategic capital, our team raised $3.1 billion in 2020, with 40% from new investors we have yet to meet in person. Market and property tours as well as due diligence activities were all conducted virtually as our team capitalized on our early investments in digital infrastructure. Our balance sheet remains the best in the industry with liquidity and combined leverage capacity between Prologis and our open-ended vehicle of more than $13 billion. Our capital markets activity in the quarter brought our total average interest rate down to 2%. We will look for additional opportunities to refinance at attractive rates. In fact, at current interest rates and our mix of currencies, we could issue 10-year debt at a blended all-in rate of 1%. Turning to our guidance for 2021, here are the key components on our share basis. We expect cash same-store NOI growth to range between 3.5% to 4.5%. We're estimating bad debt expense to range between 20 and 40 basis points of gross revenues and average occupancy for our operating portfolio to range between 95.5% and 96.5%. We expect a seasonal occupancy drop in the first quarter then trend higher as the year progresses. For strategic capital, we expect revenue excluding promotes to range between $435 million and $450 million. Promote revenue will be negligible in 2021. In fact, we'll have net promote expenses of $0.02 per share for the year, which relates to the amortization of costs from prior period promotes. Our historic net promote income averages approximately 20 basis points for third-party AUM, which would be $0.06 to $0.07 of earnings per share based on current promotable AUM. Looking ahead, recent property appreciation leads us to expect net promote income per share in 2022 to be at or above this historic average. We expect to start between $2.3 billion and $2.7 billion in new development with 45% new leases and for stabilizations to range between $1.9 billion and $2.1 billion. Dispositions will range between $1 billion and $1.4 billion with the majority expected to close in the first half of 2021. We are forecasting net deployment uses of $350 million at the midpoint and as a result, our leverage remains effectively flat in 2021. Putting this altogether, we expect core FFO, including the $0.02 of net promote expense to range between $3.88 to $3.98 per share. Core FFO excluding promotes will range between $3.90 and $4 per share with year-over-year growth at the midpoint of more than 10%, delivering another year of exceptional growth. We entered 2021 with optimism and confidence. Our ability to deliver value for our customers beyond real estate using our unmatched purchasing power and significant investments in technology, innovation, and data are significant competitive advantages that will drive our performance further. With that, I'll turn it back to the operator for your questions.

Your guidance for 2021 on development services is almost 20% higher in terms of last year. So could you just go through what the balance of build-to-suit in speculative development is and how much visibility do you have on that? Could it be increased further?

Yes, Caitlin. This is Gene. I'll take that question. And you are breaking up a little bit, but I think you're talking about the development activity in the coming year. So this year, about 85% of what we're guiding to are main transactions. So, we have very few placeholders. And as Tom mentioned, we're 45% build-to-suit in the forecast, and it is really difficult to forecast how that's going to play out. But if there is a bias, it probably is to the upside. But at this point, we're comfortable with the forecast.

And probably better, but sorry if I'm still breaking up. And then if I could ask just second. Just, Tom, you mentioned that short-term leasing was up. So just wondering how did the short-term leases compare to regular leases in terms of points and rents and the thought process on competing those versus longer-term leases?

Thanks, Caitlin. You broke up a little bit there. But I think just how our bond process runs short-term, we think. I think we're going to continue to see short-term leasing probably stay at elevated levels, just given the tightness of the market and the need for customers to act and move quickly as we get into 2021. I hope that addresses your question.

Thanks for taking the questions. So maybe just first one going to the core guidance, same-store NOI guidance. If we sort of look at your components with the occupancy, on average, slight uptick, escalators, which I'm assuming 2.5%, 3% bumps that you're going to get from expiration, rent expiring. Seems to me that if I put all that together, you should be kind of well, if not well above, but above 4%. So, I'm just wondering if you can walk us through maybe what the puts are there and what would get you to the bottom end of that range?

Yes. The simplest way to look at it for same-store in 2021 is it's all driven primarily by rent change on roll. So think about 25% roll and, I'm sorry, 15% lease roll, and from a GAAP perspective, think about 25%-ish rent change on roll. And as you mentioned, occupancy and bad debt are pretty consistent, don't move much year-over-year, so that drives the GAAP same-store. From a cash perspective, think about that same 15%, we'll call it 12-ish percent rent change on roll, you're going to see bumps from around 3.25% on the portfolio in place, and then you'll see a little bit of normal free rent out of that. But those components should get you right near the midpoint of our guidance.

Thank you. I was hoping to take a step back a little bit and just get your perspectives on the election and what do you think it might mean in terms of policy or tentative reaction or customer reaction to just kind of new leadership in terms of what you think might change for warehouse demand, whether certain markets look more interesting? Or any themes or trends you think we should be watching? And I guess, thinking about the Biden's Buy America plan, wondering what your thoughts are on that as well? Thank you.

Sure, Jamie. I'll take a stab at that. I think the most significant near-term thing is going to be the infrastructure spending and that will have a positive effect on demand for our product. With respect to Buy U.S. first and all, we had that in the previous administration, but if you actually look at the numbers, they don't support the newspaper headlines. So, we don't think there's going to be a material change in that because we haven't had any of that in the last four years either. That was pretty much the same promoted policy. But the big drivers of our business are not necessarily economic policy. It's just the mix of consumption between bricks and mortar and e-commerce and the underlying growth rate of the economy, which should be very strong bouncing from a down year and recovering all of that in 2021. So, we think those are the two big drivers. And economic policy will be affected a little bit around the edges but not the main driver.

I guess I wanted to take Tom's comment about the 65 million square feet of leasing in the quarter, which is exceptionally strong. And maybe just look at Page 4 of the supplemental where you have that chart that shows new lease proposals and then the space utilization. And I'm just trying to kind of square the proposals with strong leasing and then just curious why the utilization figure is trending downward and maybe not upward?

Actually, I'm going to take that. It's pretty simple. People are running out of inventory because they haven't pre-positioned enough inventory in the system to support the level of activity. And remember, we need more inventory in the online channel than we do in the offline channel. One of the big issues with inventories is that we can't get the containers back to China. So, actually, we could support a much higher utilization and lower levels of stock-outs, but that's what's going on.

Thanks. Good morning. In the fourth quarter, your development starts ramped up with a lower expected development margin of 23% despite lower build-to-suit activity this quarter. Can you just comment on this dynamic and if we could run rate going forward on margins?

Yes. This is Eugene. I'll take that. So, you are going to see and have seen for the past several years that our forecasted margins are quite a bit lower than our margins historically because these are underwritten margins. Now, we have been beating these margins for a variety of reasons - rent growth, cap rate compression. I would expect, and I think we'll retain this for a long time, that you will see over time margins will normalize. But that really depends on what the future cap rate environment looks like.

Thank you. I was hoping you could just talk a little bit about expectations for rent growth in the different regions this year? And maybe you can break that up, if you see a difference between gateway distribution markets versus multi-market distribution, city distribution, and Last Touch?

Hi, Nick. It's Chris here. Yes, we expect U.S. rent growth to be 5% in 2020 and a little bit better than 4% globally. In terms of the different product types, look, we highlighted a couple of geographies that we expect to outperform, for example, the U.K. and Northern Europe. In the United States, we've had a combination of the major Last Touch city distribution markets as well as some gateway distribution markets outperforming. I'm thinking New York, New Jersey, I'm thinking Toronto and Southern California. They outperformed in 2020 and we expect them to outperform in 2021.

I would like to hear more about the evolving demand and leasing dynamics in the European portfolio. And really specifically, when it comes to occupancy, which until last year was a bit of a headwind, it was slipping every quarter starting back in 4Q '18; now admittedly from a high point. But how do things feel on the ground in Europe? Have off-nets in fact stabilized and can we expect growth from here? I mean, I believe this is the first positive year-over-year comp in six quarters. Thanks.

Yes. That may be the case in terms of the math I've read. Europe is generally a more balanced market than the U.S. Demand and supply seem to move in sync together and generally vacancy rates are lower. The two exceptions are probably, I would say, the big exception is Poland. And from time to time, you get Spain sort of moving up to that volatile end of the market, but the rest of Europe is very well occupied. So it's really the volume of rollovers in Poland and Spain that drive that balance and occupancy on the margin. But throughout, our occupancies in Europe have been higher than the rest of our portfolio and in the U.S. anyway.

Hamid, maybe this is one for you. Do you think that the Exeter ETT deal announced this morning provides any read-through to your private capital business?

Well, I think our private capital business continues to be undervalued by the street. All you got to do is look at the comps of publicly traded investment management firms, and once you consider the fact that well over 90% of our assets are in infinite life vehicles and they generate significant promotes from time to time, and that our margins keep on increasing, I think that multiple should be in the low 20s. But I think most of the NAV models that I see are in the low teens or maybe even 10. So, I think the street continues to undervalue that business. Would it be worth more if we crystallized that value in a very specific transaction? Sure. But is it worth the headache on a company that has $140 billion of assets to move around the value by $0.50 or bucket share? Probably not. So, we think there is upside to our NAV from our Investment Management business.

Can you provide some color on tenant demand you're seeing? I mean, I know in the beginning of the year, in the middle of the year, a lot of the demand - or Amazon specifically has been extremely active. And have you seen or do you expect to see that tenant interest broaden out more meaningfully as we move into 2021?

Yes, let me start it, then Mike can give you more color. But we think demand is pretty broad, I mean, sure e-commerce gets a lot of the headlines because on the margin that is the source of new demand, but there is plenty of demand from other sectors that continues and forms a strong base. And within the e-commerce sector, of course, Amazon is the biggest player, so they get a lot of play. But remember, Amazon is more in change of our total ABR and there are lots of other tenants that are doing well. In fact, I would say everybody is pretty much doing well with the exception of the uses that support hospitality like convention, exhibition, people, and things of that nature. The rest of the market is pretty strong. Mike, you want to provide more color on that?

Yes, let's look at it in traditional leasing and in build-to-suits. On the leasing front, their fourth-quarter performance sort of normalized compared to typical Amazon numbers with us after robust Amazon activity in the second and third quarters. But the message there is, there's plenty of other companies' broad base that are driving traditional e-com leasing and I think that speaks to the philosophy going forward. And then on the build-to-suit side, yes, Amazon was very active. We did six build-to-suits with them in the quarter and call it 10 for the year out of 28. However, there was a ton of restructuring well underway with the home improvement folks, food and beverage, healthcare, well underway with restructuring pre-COVID. Perhaps they took a couple of months pause during COVID but man they're coming back with a vengeance and marching forward with those restructurings. So while we'll see plenty of Amazon, I am really encouraged by the other uses. We just signed a big lease with Kraft about a month ago, and working with a ton of brand names next year, we'll be happy to talk more about.

Maybe a follow-up to an earlier question, but I think last year we were talking about the cadence potentially of development stabilizations given kind of the buildup of starts in the resurgence there. And I'm just kind of curious, it looks, year-over-year like that pace of stabilizations is expected to slow. Is there something going on there that changed that outlook?

Well, the only thing I can think of is that we deferred some starts immediately when COVID hit because we didn't know what kind of environment we were in. But we've essentially restarted most if not all of those things and will be restarting them. So I think we just got that pushed out, but the volume that's behind it is very significant. So I would say the total level of stabilizations will be increased in the next couple of years beyond what it would have been and what our expectations would have been certainly at the beginning of COVID. But I would say even more than our expectations at the beginning of last year prior to COVID.

I want to go back to something Chris had mentioned about above-average rent growth for last touch assets, which makes a lot of sense. Obviously, we understand the supply-constrained nature of industrial markets in major cities, but it seems like nowadays every real estate developer is an industrial developer, and especially in New York City. We're seeing a big jump in infill industrial projects. Could this jump in development activity create a supply-demand imbalance and potentially put the brakes on rent growth for some of your last touch assets?

It could, but I think what's going on in New York and elsewhere is that there is a lot of price discovery; nobody really knows what the ability to pay is for some of these customers. In all of these locations, we underestimated the rental value. So at least for the time being, all the price discovery has been good. The other thing you should take into account is that in these infill locations, you've got a lot of developers, but you're not going to have a lot more land or buildings that can be rehabilitated. So I think you'll see it in terms of pressure on pricing of those assets, more than you would see on absolute supply because the supply is pretty inelastic and will show up in price.

I was hoping to get a little bit more color on the investment sales market and your interest in acquisitions. There have been several large portfolios in the U.S. specifically that have traded either in the second half of last year or early on this year and I know you guys typically are looking at anything sizable that hits the market. So without getting into specifics, unless you want to, can you just talk about what kept you on the sidelines in these situations with the pricing and underwriting being stretched? Is it more of the geographic footprint that just doesn't overlap enough or maybe it's just your focus on more on development at this point? Any color there would be helpful.

So all of the above. Let me give you a quick answer and Gene will fill in the blanks. We are not good buyers of core real estate auction by a brokerage house where there are 55 people showing up at the margin. A lot of these people have to build up their industrial capability and everybody is trying to get into that business because the other property types don't offer very many opportunities. So, those kinds of just looking it out on price, is not our business. So that means that building out our land bank, doing value-added acquisitions where we can bring our leasing and operational expertise to the table, deals that are hairy, etc., but the general framework for looking at deals is returns, how we can differentiate and have a competitive advantage. Also, in the case of portfolio deals, what that fit is if we have to buy 100 buildings and sell 90 of them, that's probably not a very attractive transaction for us. The other thing I would just mention is that you posed the question in a sense that we're only going after big deals. We do a lot of $5 million-only deals too, they just don't show up. So we're there looking at pretty much everything that moves out there and we're there with offers on most if not all of the ones that meet our quality standards, but thankfully in a lot of those core situations, we lose. So we're good with that. We're on the selling side of a lot of those transactions as well.

Yes. I just had a couple of things. Last year, we had 300 matters go through Investment Committee. So it means that we look at a range of deal sizes and we look at every single deal. Every single deal, we will underwrite it, look at it. We are a bit picky on quality, that's an explanation. And we execute when it makes sense for us, but I wouldn't read into this that we're uninterested.

Tom, I wanted to follow up on what you mentioned earlier about a larger percentage of short-term leases in the fourth quarter. We did notice lease economics were somewhat marginal, but we expect to see changes. I’m curious if these economic conditions are just a continuation from the COVID era or if we will be adjusting to the right lease economics moving forward. The 250,000 to 500,000 square feet spaces seem to be balanced with gains in the 1 to 255 range. Is this affecting the overall economics? I'm trying to understand the direction of the economics and the factors influencing these occupancy trends.

Yes, Dave. I'll take both of those. On the first one, remember leases less than one year are excluded from our leasing metrics, that's consistent with what we do across our agreements with the other logistics around metrics. So that is what's happening; if you're looking at turnover costs, it's the higher mix of new leasing versus renewals. We saw that in Q3, we saw in Q4 and that is what is driving turnover costs slightly higher this quarter and same story last quarter. Regarding economics, I wouldn't look at - yes, we did see space sizes under 100,000 square feet and it actually went up 100 basis points. But I wouldn't look at the other segments; they are quite strong. I think that's just some activity that happened at quarter end and it's noise, and all segments are doing quite well.

This might be related to blend or a question just about capital allocation. But you mentioned that you saw most of the non-industrial assets from the Liberty portfolio, but it looks like your held for sale portfolio is still somewhat elevated, so maybe you can talk about the pace of those sales going forward. And then secondly, we're on the operating portfolio looking at Bay Area occupancy went down about 300 basis points of sale quarter-over-quarter. So maybe just comment on how the local economic environment there is affecting industrial demand. Thank you.

Yes, on the pace of sales, we mentioned with our need for capital - we're depending on how you measure it 19%-20% levered. So we don't want to dilute ourselves, and those assets are doing nothing other than appreciating. So we'll take our time with respect to selling the industrial assets, and we'll match them with our capital needs, self-funding model. With respect to the Bay Area, my general comment - and Gene may want to say more about this - is that the Bay Area is soft. There is no question that the Bay Area, after almost a decade of straight lineup, has gotten hit pretty hard in this downturn. So I would say it is softer than LA in a big way. But the good news is that there has been so much rental appreciation that even as these leases expire, we still in many cases are rolling them up to market, to market is just not as high as it would have been say a year ago.

Yes, Eric. The only thing I'd add on San Francisco, agree with everything Hamid said and one thing to keep in mind vacancy is 6%-6.5% in the San Francisco Bay area. So, it isn't as if you have weak conditions on top of a very high vacancy rate. So we're watching it and obviously the performance is very much disconnected with LA, but fundamentally vacancies are not dead right now.

One other thing I would say about the Bay Area. I think the number is 10 million square feet, maybe 12 million square feet has been taken out of supply in the last five years or so and that trend continues because we're competing against land uses that just gobble up industrial. So actually, it's one of those markets where supply in the core Bay Area submarkets is actually going down. It's been converted to life sciences, it's been converted to apartments, and all kinds of other things.

Occupancy globally saw a nice improvement in 4Q, but could you talk about what drove the strong rebound in ending occupancy in Asia specifically?

We got a new team in place in China that has been very aggressive in leasing space and the vast majority of our expected vacancy in China was in the company in the spec basis was in China, and we're addressing that. The new team is doing a fabulous job.

Yes Hamid, I was hoping maybe you pick up on what you were just talking about with the Bay Area and maybe just think more broadly I'm just looking at your top four markets in the U.S., Southern California, New York-New Jersey, Bay Area, and Chicago, obviously places that through the pandemic have seen decent outflows of people into the Southeast. So I realize the supply is constrained in those markets. So I'm just thinking in terms of incremental investment going forward. I mean, do we expect more investment in places like Dallas and Atlanta and Florida, places that are benefiting demographically or do you think you kind of expect things to go back to how they were?

Look, I think all of the markets that you mentioned were running so far above trend for a decade and that had created so many imbalances that I actually think it's pretty good to take a breather for some of those markets. No, I don't really think California is falling into the ocean. There are a lot of people in the middle of the country cheering for that, but it's not going to happen. I mean just look at the last quarter, you've had - look at the market cap that's been created in this area, it's probably more than it's been created in the decade in some of those markets. So, no, I don't think - so the numbers are actually pretty interesting if you look at the overall California numbers. I don't have them specifically for the Bay Area, but this year - and the way they measure it's a June 30, year-end, but in the year ended June 30, you had 260,000 people move out of California that compares to the year before like a more normal year about 230,000 people. So there is always this churning that happened, but all of that is that 0.5% of the total population of California, and you still have internal growth. So, California is still growing, it's just not growing at the same pace as it was before. I think some of the outflows have to do with temporary work from home kind of situations. We don't expect all of those things to last forever, so you'll have some people coming back to California. I think housing prices have moderated, certainly on the rental side. So, yeah, I think California's softer than it's been, but it's been on such a tear that it would have had to come to some kind of moderation, and it has.

You've already touched on this, but maybe I can follow up on it. Have your underwriting standards parameters changed at all looking to 2021 and on the margin, where do you think it's definite versus the average industrial builder or buyer?

I think our underwriting has moved down; the required returns have moved down in the same direction as the weighted average cost of capital has moved down, I mean, capital market returns are lower. So real estate returns are lower as well. What we really look at is relative value, and in a lot of the situations, the way that the money coming into the industrial sector has created the situation where good assets and bad assets are not so great assets, the yield is compressing between the two and people just want to pick that industrial box. A lot of those people also tend to be leveraged buyers in which they can take better advantage of those lower rates. So, but the way we underwrite the assets in terms of quality and the ability of those assets to compete in the marketplace that has never changed. That's the primary filter, but obviously, because of higher rents and lower cap rates, pricing has changed.

Looking at USLV and PELP U.S. ownership stakes is about 50% there. Do you see that gravitating down anytime soon?

In USLV is our venture with Norges, actually they're both our ventures with Norges, and our deal with them was that we would be 50/50 partners. We have certain rights to sell down to 20% in one of those ventures and, but no, we like it, it's been a good investment and we continue to hold it, and we've got plenty of capital coming from other places, mostly disposition. So we haven't tapped that source for capital. It's there if we need it, but I don't think we're going to need it for quite some time. We can self-fund out of the non-strategic dispositions and also our contributions.

This is Sumit here in for Nick. So you've been recently doing a lot more analysis on labor shed debt as well as availability in some of new markets, for example in Atlanta and some markets seem to sell themselves like Inland Empire; no one puts out a flyer more than a page long. So I'm interested in understanding whether the labor shed or labor availability issue, is it back or is it in certain markets, and if it is?

I think labor shortage of labor is, you weren't coming through perfectly, clearly, but I think your question was, is labor continuing to be a constraint. The answer is yes, pretty much everywhere. I was really surprised frankly when I heard from our large customers, I think back in April and May in the early stages of COVID relatively early stages of COVID, that labor continues to be the number one, number two, and number three problem. I thought it would have moderated given the downturn and the unemployment rate. The key in that calculus is quality of labor. We've taken a lot of steps as you know with our community workforce initiatives to try to address that for our customers. But no matter how hard we work or how large that initiative get. It's not going to even begin to make a dent in the problem that we have. Are there geographical differences from place-to-place for sure, but those geographical differences have already adjusted. Because people don't put their warehouses in places where there is no labor whatsoever. They put it in places where there is labor, but there's just not as much labor as they would like. They're all competing with one another, and the turnover rate in that kind of labor is very high, it's about 40% a year. So people move for relatively small changes in compensation and environment, and customers are paying more attention to the environment and all those amenities that can really be more attractive to labor in addition to paying more.

Thanks for taking a follow-up. We've seen some news on Prologis buying some urban land lately. I'm just curious, how should we think about multi-story as a composition of your 2021 development starts? And similarly with the rotation from REIT to REIT - bricks and mortar to e-commerce any additional thoughts from the research you put out on retail conversions and maybe that becoming a larger part of your 2021 development starts?

Well Jamie, I don't know what papers you're referring to. But we've been buying urban land in terms of covered land place for at least seven or eight years on a pretty steady basis. So we've been at this business for a long time and we're broadening it in certain markets, but now we've been after it for quite some time and it's not just in the U.S., also in Europe. We're buying those covered land places and those can be either leased as staging areas. You can get very good returns on those while you wait for the market or rents or entitlements to convert them to industrial land. We don't have a multi-story strategy specifically; we have an infill strategy, and that infill strategy drives you to multi-story in certain locations with certain land economics, but there is nothing in our business plan that says thou shall build three multi-story buildings this year. I mean, we were very opportunistic in that sense.

Tom earlier, I think you discussed 200 million square feet of incremental demand over the next few years? How much of that do you think can get taken care of by just innovation with existing boxes rejiggering, automation, more racking, etc., versus true incremental demand that is going to lead to leasing from your end or others?

Actually, Chris is probably in a better position to answer that. We've done a lot of work around automation and modernizing space. So Chris, why don't you talk to that?

Yes sure, so the stat that Manny's referring to e-commerce specifically, we expect it will generate 150 million square feet perhaps more in the U.S. and 200 million square feet likely more globally. Manny, no, I don't think it's about efficiency and the introduction of technologies. I think this is about needing to strengthen supply chains over time. As it relates to specific to automation, the research we've done is to take a look at the productivity of assets, both through the brick-and-mortar supply chain as well as the e-commerce supply chain. We don't see a lot of change there. Instead, when we look at that incremental 200 million square feet going forward, I think you're going to see that focus on Last Touch locations and city distribution locations, particularly in the world's global markets, those 24-hour cities. And as Michael was referring to earlier, it could be a lot of diversity in that customer mix. A lot of customers are starting to reassess how they want to go to market with e-commerce in 2021 and beyond, and I think you're going to see a lot of diversity there. So it's much more about bringing in new real estate requirements rather than introducing technology.

Yes, and if I can jump at the end of that. I didn't answer part of Jamie's question about retail conversions, once you have our latest thinking in that and Chris's paper. So I don't have a whole lot to add to that. I think you will see more headlines about that than actual space converted, but you will see some space converted. So for a variety of reasons that you can read about in the paper.

Thank you. On the Liberty portfolio, originally you considered $3.5 billion of dispositions, now it looks like you're looking to sell about $1 billion, partially because you don't really need the proceeds. But can you just refresh with us how much of Liberty's original portfolio you considered non-core for the company going forward?

Yes, that view hasn't changed it's about $3.5 billion still. Of that $3.5 billion, if I remember correctly, about $700 million of it is not logistics and well put it this way, it's an office - it's a suburban office; we sold some of that. The only thing that really remains on that front is the downtown Philly assets leased to Comcast. So the rest of the assets that are available for sale are just straight up industrial. These assets would be considered in the top, I don't know 25% of most portfolios out there. It's just that they don't quite meet our standards. But they're perfectly fine assets and they're appreciating and as you've heard, I think Tom mentioned that even on the non-industrial ones we picked up 18% more value than we underwrote. So on industrial I think we're even going to do better than that. It's just no sense of - we could sell that at a really high price right now, but if the capital is sitting around not doing anything, we'll give a bunch of it back in terms of dilution. So we're going to be patient with that.