Prologis Inc (PLD) — Q3 2023 Earnings Call Transcript

Thanks, John, and good morning, everyone. Welcome to our third quarter 2023 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations. I’d like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates, as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or other SEC filings. Additionally, our third quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP and in accordance with Reg G, we have provided a reconciliation to those measures. I’d like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, our CEO, and our entire executive team are also with us today. With that, I will hand the call over to Tim.

Thanks, Jill. Good morning, everybody, and thank you for joining our call. The third quarter marked a continuation of themes we have been anticipating for more than a year, namely; growing supply translating to increased market vacancy; continued moderation of demand; and market rent growth that will slow until the low levels of new starts drive reduced availability over time. We have operated in accordance with these views in both our approach to leasing, as well as timing of new development. What’s incremental to our forecast is that the continued hawkish posture from central banks and the impact it’s had on rates is delaying decision-making and willingness to take expansion space early. The geopolitical backdrop has clearly become more troubling as well, amounting to a lack of clarity that will likely weigh on demand. In the meantime, and also playing out to our expectations is that our existing lease mark-to-market will drive durable earnings growth as it did in delivering record rent change this quarter, as well as strong earnings and same-store growth. We remain focused on the fact that we own assets critical to the supply chain with long-term secular drivers that remain intact. Further, the outlook for future supply will continue to face structural barriers, ultimately driving occupancy, rents, and values. In terms of our results, we had an excellent quarter with core FFO excluding net promote income of $1.33 per share. This result includes approximately $0.03 of one-time items related to interest and termination income, as well as the timing of expenses, which we can address in Q&A. Occupancy ticked up over the quarter to 97.5%, aided by retention of 77%. Net effective rent change was a record 84% at our share, with notable contributions from Northern New Jersey at 200%, Toronto at 187%, and Southern California at 165%. Same-store growth on a net effective and cash basis was 9.3% and 9.5%, respectively, driven predominantly by rent change. We saw market rents grow roughly 60 basis points during the quarter, the slower pace embedded in our forecast. In combination with the strong build of in-place rents, our lease mark-to-market recalculates to 62% as of September. We raised approximately $1.4 billion in new financings at an average interest rate of 3.2%, comprised principally of $760 million within our ventures, as well as a recast of our Yen credit facility increasing our aggregate line availability. In combination with our cash position, we ended the quarter with a record $6.9 billion of liquidity. Finally, it’s noteworthy that our debt-to-EBITDA has remained very low and essentially flat all year, hovering in the mid-4 times range, despite our increased financing activity, a demonstration of the tremendous growth in our nominal EBITDA. Turning to our markets, while rising, vacancy remains historically very low in the U.S., Mexico, and Europe. Market vacancy increased approximately 70 basis points during the quarter in the U.S., driven by low absorption, as well as recently delivered but unleased completions. Europe experienced similar dynamics with an overall increase in market vacancy of 50 basis points. At the macro level, our expectations for the U.S. are for completions to outpace net absorption by a cumulative 150 million square feet to 200 million square feet over the next three quarters. Then, over the subsequent three quarters, we see that trend reversing with demand exceeding supply and recovering the net 75 million to 125 million square feet. That trend may extend further into 2025, as we believe development starts over the next several quarters are likely to remain low. Whatever the precise path, we expect that as vacancy normalizes over the long term, our portfolio will outperform the market due to both its location and quality, as well as the strength of our relationships and operating platform. In this regard, our portfolio has been largely resilient to moderating demand. Our teams would describe the depth of our leasing pipeline as consistent with the last few quarters. In coming fresh off of one of our customer advisory board sessions, it’s clear that our customers have plans to continue to expand their footprint, increasing capacity and resiliency. However, what’s also clear is that they are slowing such investments until there is more clarity in the economic environment. In the U.S., rents increased in most of our markets with the strongest located in the Sunbelt, Mid-Atlantic, and Northern California regions. Europe and Mexico were also bright spots for growth in the quarter. Rents across our Southern California sub-markets declined approximately 2% as it continues to adjust to higher levels of vacancy. While the markets and outlook are mixed, we remain confident in continued market rent growth in the U.S. and globally over the coming year, albeit at a slow pace while the pipeline continues to get absorbed. From our appraisals, U.S. values declined approximately 3% while European values remain stable, in fact, having a very modest write-up. The difference isn’t too surprising as the Fed’s language around inflation and the economy has had more effect in the U.S. capital markets, driving the 10-year up 100 basis points since our last earnings call, compared to the bund at just 50 basis points. We believe that this is likely another instance, as we saw one year ago, where U.S. appraisals at the end of the quarter have not had sufficient time to react to the increase in rates and we are thus pausing on appraisal-based activity in USLF for at least one quarter. Elsewhere, values in Mexico are up 8.5%, while China experienced its first meaningful decline of 6.5%, a write-down that we don’t believe has fully run its course. Our funds experienced their first quarter of net positive inflows with approximately $180 million of new commitments versus new redemption requests of $115 million. Given other activity in the quarter, the net redemptions have been reduced from their height of $1.6 billion to approximately $700 million or roughly 2% of third-party AUMs. In terms of our own deployment, development starts ramped up during the quarter, crossing $1 billion, over half of which is related to a data center opportunity in our central region, a testament to our higher and better use strategy and strategically located land bank. Also notable is the acquisition of $118 million of land, including a strategic parcel in Las Vegas, which will build out an additional 10 million square feet over time and brings our total build-out of land globally to over $40 billion. We are laser-focused on identifying and executing value creation in our core business, our energy business, and their adjacencies. Combined with the debt capacity and liquidity we have worked hard to build and preserve, we see the environment as rich with opportunity. Moving to guidance, we are increasing the average occupancy to a range between 97.25% and 97.5%. As a result, we are increasing our same-store guidance to a range of 9% to 9.25% on a net effective basis and 9.75% to 10% on a cash basis. We are maintaining our strategic capital revenue guidance, excluding promotes to a range of $520 million to $530 million and adjusting G&A guidance to range between $390 million and $395 million. Our development starts guidance is increased to a new range of $3 billion to $3.5 billion at our share, driven primarily by the data center start mentioned earlier. We have $500 million of contribution and disposition activity during the quarter and given our commentary on USLF valuations, we are pausing our planned contributions into that vehicle this quarter and reducing our combined contribution and disposition guidance to a range of $1.7 billion to $2.3 billion. In the end, we are adjusting guidance for GAAP earnings to a range of $3.30 per share to $3.35 per share. We are increasing our core FFO, including promotes guidance to a range of $5.58 per share to $5.60 per share and are increasing core FFO, excluding promotes to a range between $5.08 per share and $5.10 per share, growth of nearly 10.5%. I know that many of you are focusing on 2024, so I’d like to take an opportunity to remind you that the Duke portfolio will be entering the same-store pool in 2024, which will widen the recently observed delta between net effective and cash same-store growth. This is, of course, because Duke rents were marked-to-market at close one year ago, so its contribution to net effective same-store growth and earnings will be minimal, even though the cash rent change will be on par with the rest of the Prologis portfolio. In closing, we are navigating the current environment, assured that whatever the economy brings in the short term, we are positioned to outperform over the long term. This stems from not only the premier logistics portfolio and customer franchise with one of the best balance sheets among corporates, but also highly visible earnings and portfolio growth ahead of us. We know that turbulent times can bring opportunity for those who are prepared and that’s been central to our strategy and management as a company. I’d like to also remind you of our upcoming Investor Forum on December 13th in New York, our first in four years. We are looking forward to spending the day with you, sharing more about our business, outlook and opportunities ahead. Additional information is available on our website and in our earnings press release. And with that, I will hand it back to the Operator for your questions.

Good morning. Thank you for taking my question. Tim, could you help us clarify some of the points from your prepared remarks? You mentioned potentially softer demand, yet you are also forecasting an increase in build-to-suit developments. Additionally, occupancy has been stronger than expected, even before the impact of lower development starts becomes apparent. How should we interpret all these factors and the trends in supply and demand as we move from 2023 into 2024? Thank you.

Sure. Demand is definitely softer. It’s closer to normal, maybe even a little bit below normal at this instant. There is a lot of latent demand that large companies having large requirements are continuing to talk to us about build-to-suits, but they are reluctant to pull the trigger.

Hey, guys. Let me know if you are having trouble hearing me, because I am having trouble hearing you. But I just wanted to touch on the data center build-to-suits in the quarter and see if you guys could break out what the yields on those were relative to the blended yields on the overall development starts? And maybe just give a little bit more color about the opportunity with your partner on this one, the plan on whether you are going to hold this or anticipate selling it upon completion of that and just a little bit more about the capacity within the land bank to do more of the data center sales?

I am sorry. We are having some technical difficulties here and I can’t really explain it.

Hello.

Can you guys hear me? You can hear me again. Okay. So let me finish the first question and then I will go to the second question. To the extent I heard it, which wasn’t great. On the first question, what I wanted to say is that, the data centers account for a pretty significant volume of the build-to-suits and that’s why they are higher. But industrial logistics build-to-suits are kind of in par and in line with our expectations. The reason occupancy is higher, it’s unique to the quality of our portfolio and just the natural role of leases, but market occupancy is slightly lower. So we are outperforming the market by more than we did before. I think that covers the first question. The second question was how should we think about the build-to-suits in terms of its effect on our going in yields and the like, and for that, I am going to turn it over to Dan here. But generally, the build-to-suits strategy of ours is an extension of our higher and best-use strategy. We own a lot of high-quality land in markets that are in the path of development and are popular data center markets. And while we may occasionally buy land for data centers, our primary strategy is converting our existing portfolio to data center products to the extent they have power availability. We are getting a lot of people knocking on our door for those opportunities and we think going forward, it’s going to be a pretty significant part of our activity, although it’s lumpy and less prone to precise predictions like the logistic business, but you will hear more about that. Now, strategically, this is important to understand. We funded our business without issuing any equity basically since 2012. The last 10 years or 11 years we have not issued any equity. How we financed our business is by disposing of real estate that was non-strategic to us, logistics real estate, and we have done a lot of dispositions. You can think of the data center strategy as a way of funding our growth. That’s where the growth capital is going to come from. We are not at the moment interested in being in that business in terms of long-term ownership, it’s more of a development and harvest strategy and that capital that comes out of the margins of those deals will be a substantial contributor to our growth going forward. Dan, you want to talk about the initial yields on the data center?

Well, what I would say is, on this particular data center, we are under a strict confidentiality. So we can’t be speaking about any particular yield points by any means. But what I would say is, we have been building capabilities internally to ensure that we hit the market for these deals and you will see those play out as we announce more data centers going forward.

What I would say, generally, though, without getting specific on this opportunity, we think the margins that come out of our data center business, by definition, based on our historic cost of land or even the market value of land, will be orders of magnitude higher than they would be under logistics build-out. So multiples of a normal margin.

Yeah. Thanks and good morning. I just wanted to follow up on the development and just make sure I understand on the fourth quarter, I think, you have got something like $1.9 billion of planned starts, given that you have done about $1.4 billion year-to-date. So just curious, does that include other data centers or is that all traditional industrial? And if so, what is the mix between spec and build-to-suit on that fourth quarter starts volume? Thanks.

Sure, Steve. This is Dan. The majority of our Q4 starts are in logistics. We have one or two smaller data center starts planned, but overall it's about a 50-50 split between build-to-suit and speculative projects. I want to emphasize that we have been anticipating a back-end loaded forecast for roughly four quarters now. With market development starts currently at 65% down from the peak, this is unfolding exactly as we expected, and we have been preparing all year for a significant volume of starts in Q4.

Yeah. The portion of build-to-suit is obviously a lot higher than that if you include the data centers. What Dan meant was a mix of logistics and logistics spec versus build-to-suit.

Hi. Thanks. Question, as you think about 2024, Tim, you mentioned that market rent growth increased 60 basis points relative to last quarter. That’s down from 2.5% last quarter. I think you indicated that market rent growth is expected to be positive in the year ahead. As we think about the trajectory of rent growth and what you are anticipating, do you see potential for sequential or year-over-year decreases in market rents in the U.S. or globally over the next few quarters as deliveries outpace absorption or do you expect rent growth to stay positive throughout that period during that timeframe?

Hey, Todd. It’s Chris Caton. Thanks for the question. Yes. We expect rent growth to remain positive throughout that time period. Market conditions are stable and there are a handful of markets that we have talked about that are softer, but by and large, markets are proving resilient with rent growth in line or ahead of inflation.

Hi, everyone. Maybe we could talk about property acquisitions a little. I know it’s not as large of an activity as developments, but guidance for this year increased while transaction volumes at an industry level are down significantly. You did the $3 billion acquisition mid-year. So what sorts of acquisitions are most interesting to you today? Could you talk a little bit about who you are buying from, maybe why they are selling and how you get comfortable on what the right price should be?

Sure. It’s a dynamic market and that’s the essence of your question. It’s really hard to understand what the returns should be and how we approach acquisitions. First, we are more selective than we have been regarding quality and fit with our portfolio. We no longer have to buy lesser properties alongside better ones, which previously required us to dispose of unwanted properties, a task we managed quite successfully even in a declining cap rate environment, yielding profits. However, we don’t expect that trend to continue. We are being very selective about our purchases. The portfolios we intend to acquire will almost entirely consist of whole portfolios. Additionally, consider the current treasury yields; with an increase of 300 basis points bringing them to about 4.5%, core properties are trading at high 5% to low 6% internal rates of return. Let's avoid discussing cap rates due to their complex nature. For simplification, let's say around 6%. Adjusting for the change in treasury yields, you would realistically need to aim for a 9% leveraged internal rate of return, assuming supply and demand in the capital market are balanced. We sense more opportunities on the horizon in a capital-constrained environment, and we are fortunate to have a robust balance sheet to take advantage of these prospects. I don't anticipate distress similar to past crises, but I believe the quantity of opportunities will surpass available capital, and we intend to capitalize on that. I would estimate leveraged internal rates of return that have a handle of around 9%, possibly up to 9.5% depending on the situation. We are observing the supply gradually loosening and coming onto the market, so expect to see more transactions in the next six months. Dan, do you have anything to add?

The only thing I would add is, our teams around the globe are literally turning over every stone daily. And this is land acquisitions, this is core acquisitions, it’s value-add acquisitions and the teams turn to opportunistic right now. So it’s really hard to peg exactly where we are going to land our acquisition volume for the year, which is why you saw us move it up a couple hundred million after this Phoenix transaction. But overall, I think our teams are going to continue to find opportunistic transactions consistent with what Hamid just said on the returns.

Thank you. I just wanted to clarify, so you are expecting over the next few quarters a significant demand shortfall. And I am wondering if during that time period, are you planning to be more aggressive on rents and concessions to try to hold occupancy or are you going to hold rates just given supply is going to start to come down after that? And also if you could provide an update on the market rental forecast for 2023.

Yeah. On the rental forecast, I am afraid you are going to have to wait for that when we issue guidance and we get into that. And one thing we are going to stay away from is quarter-by-quarter forecasting of rents. It’s hard enough to guess what it is on an annual basis, much less on a quarter-to-quarter forecast. So what was the first part of the question? Oh, occupancy trade-off.

Occupancy.

It depends on the actual markets. There are about 20% of the markets that I can see us driving for occupancy and about 80% of the markets that are still in equilibrium or tighter. But the key to your question is what you asked in the middle of it, which is, how do you expect that to change? And the reason we are not going to get super aggressive on rents is because we have a belief that, just look at the starts. They are down 65% and even with moderating demand, we are going to get something like 60% or 70% of that shortfall that we are going to encounter in the next three quarters shortfall of demand, we are going to get it back in the subsequent three quarters. So there’s no sense really going cheap, it’s just. But I would say 20% of our markets, we are going to be more focused on occupancy.

Oh! Thanks. Just a two-porter on Southern California. So I guess, first, I wanted to see if you are seeing any benefit in your portfolio since September in terms of the port being resolved, the worker strikes impacting LA Basin or Inland Empire, if you are seeing any benefit there and pick up any activity. And then, secondly, just wanted to hear latest thoughts on why you think some of the weakness that you have cited there in rents in Southern California, what that dynamic is out there that would be different than other markets, meaning that Southern California is not a leading indicator for other parts of your portfolio?

Well, Southern California is very geared towards basically inflows. 40% of the inflows into this country came through Southern California and that number dropped dramatically because of the labor issues. It’s too soon to see any recovery because we are also going into the Christmas season and anything that’s going to be in a store for Christmas has already been on the water and through the ports and all that. So I think you are going to see the effects of that next year in terms of recovery of flows. About half of what used to come through LA used to stay in the LA Basin, Southern California and half of it was shipped elsewhere. We think the half that stays in Southern California for sure will stay there or come back and some of the rest will also revert back to Southern California. I am not smart enough to know whether we are going to get half of it back or three quarters of it back, but we will get a pretty substantial portion of it back. It will be more into the first quarter or second quarter of next year before you see it in the numbers. Chris, do you want to add anything?

Yeah. I will build on that by saying as the market is digesting the demand and supply picture that Hamid described. We are beginning to see some differentiation in submarkets where LA, Orange County is proving more resilient and the Inland Empire is a bit softer.

Good morning. First, a clarification that I want to get your thoughts on guidance. Can you clarify if the SoCal market rent change in the opening remarks is on a sequential or annual basis? And then appreciate the majority of your leasing for 2023 has been addressed and there’s little that could change your core outlook from here, but want to better understand the level of conservatism being factored into guidance looking into your end. What could change your views more positively or negatively? Thank you.

Hey, Camille. It’s Tim. Yeah. Just a clarification on the first part, that was a quarter-over-quarter number in SoCal, the 2% decline. And then in terms of what could change the fourth quarter, the answer is very little at this point. Certainly on the rent change side of things, most all of that leasing is already inked. We could have some surprises, very moderate I would say on the occupancy side, but I actually don’t expect that. We have a pretty tight range on occupancy as you know. So I don’t think you will see anything take us outside of our guidance.

Hey. Just a quick two-parter follow-up. Just one on the development starts and the data centers, which is intriguing. Any way to put some numbers on that on how many starts can be done annually? Is it $200 million, is it $500 million, like how big can this get is the follow-up number one. And then number two on sort of the rent growth, appreciate we want to stay away from sort of specific numbers, but as you are sort of thinking about next year, what are sort of the key markets, Southern California being one, potentially being sort of a headwind? Maybe can you talk about what are some of the neutral or potential tailwinds in terms of markets for next year? Thanks.

Okay. Your first question was great advertising for our Investor Day because that’s what we are going to devote the time to is understanding our essentials business, our data center business, and all those things. So let me defer answering that question to that date. And by the way, even on that date, you are not going to get as specific an answer as you would like. I just tell you that in advance because these are very lumpy and it depends what quarter or what year a deal lands in. Chris, do you want to address the second part?

Yeah. Absolutely. I might start by just saying one way to think about rent growth going forward is to think about the replacement cost math. We have really seen construction costs prove resilient and replacement costs prove resilient. And the interest rate dynamic that Hamid described earlier translates to the rents that are required to warrant new development. So over a medium-term horizon, a couple years, that’s going to play one of the most important factors into evaluating rent growth. As it relates to different markets, which was your question, I think it’s probably fair to point to Tim’s comments on the markets that have proved the strongest so far this year. Mid-Atlantic, Sunbelt, Northern California are markets that stand out in my mind in the U.S. and there is a range of them globally, whether it’s Toronto, Mexico, Germany, and the Netherlands. So that’s what I would look to.

Hi. Good morning. I guess one more on market rent growth. I think last quarter you gave a 2023 forecast of 7% to 9%. I don’t know if you updated that today and are you going to be providing those kind of updates on a quarterly basis going forward?

The view is 7% globally and in the U.S. We are currently around mid-6s this year, indicating growth in the fourth quarter as mentioned earlier. Regarding future guidance, I want to emphasize our upcoming Investor Day in December as the opportunity to gather new information.

Yeah. Thanks. How does the 150 million square feet to 200 million square feet gap between supply and demand over the next three quarters compare to your expectation for all of 2023? Now, correct me if I am wrong, I believe that you highlighted that there’s going to be about 150 million square foot gap in 2023. I mean, is that still a fair assumption or has this delay in demand due to the market uncertainty has kind of widened that out a little bit?

Hi. Thanks for the question. Again, it’s Chris. So, just to give you the total numbers, we are on pace to see 490 million square feet of deliveries in the United States this year against 195 million square feet of net absorption. So that gap is wider. And some of that relates simply not so much to the softness in demand that you are describing, but the timing of deliveries of the pipeline. If anything, our view of where the pipeline’s going has come down, not gone up over the last 90 days related to the trend in starts and so really it’s really timing as it relates to that gap.

Our previous forecast did not expect the sudden increase in rates we have seen over the past month and a half. We anticipated that treasuries would stabilize in the mid-3s range, not the mid-4s or approaching 5. This has shifted some of the demand. However, I am encouraged that companies are still engaging in discussions with us regarding their long-term needs, and our build-to-suit conversations remain strong across most cycles. They are hesitant to commit right now, as these decisions typically involve significant capital expenditures, which are currently being closely examined by executives.

Thanks. I wanted to gain a clearer understanding of the growth deferral you've mentioned, particularly regarding rent growth in Southern California, the Mid-Atlantic, and possibly the Sunbelt. Could you elaborate on the extent of this variation? Chris, do you anticipate this trend to persist over the next six months?

So the magnitude of the dispersion, so just to be clear, in terms of strengths versus weaknesses, because I want to be sure that wasn’t conflated, the strong markets include the Mid-Atlantic, Sunbelt, Northern California and really there are only a handful of soft markets. SoCal, we have talked about in these market that’s been flat all year. In terms of dispersion, there is a fair amount of sameness in the trend, whether you look at it on a quarterly or a calendar year basis. So rents are trending in the annualized rate from the third quarter that Tim discussed, with some markets moderately ahead, like the strong markets I described and then just really one or two markets that are notably weaker. So I guess I suppose there’s that dispersion.

Yeah. Hi. I know you have used land in the past for higher and better uses, but do you think you would be looking at these development, the data center developments to the same degree that you would be looking at them if you weren’t seeing a normalizing of a traditional industrial demand?

Absolutely. Because the margins embedded in the data center development, Mike, are orders of magnitude higher, certainly on the basis of market value under industrial use or purchase price under industrial use. So we would be doing that even if the market was tight as a drum. And by the way, let’s not get carried away. The market is in the high 4s occupancy, I mean, vacancy, sorry, that is absent 2021 and 2022 I would have said that would be my Christmas present would be vacancy rates that are sub-5 in any part of the cycle other than the last couple of years. So the markets are strong, but the data center opportunities, if you can get the power, the demand is there and it’s been boosted by AI and a bunch of other things. So we see sort of a rush of data center opportunities and the large players and they are all big credit players into the business and they can’t get enough of this stuff to keep up with demand.

Yeah. Thanks. Two quick questions. First of all, on the economy, I am wondering if you are seeing any changes to your watch list among your tenants or any sectors in particular that are starting to show weakness. And the second question is really in order to get the kind of 9% ROE returns on acquisitions, do you have to target longer waltz or how do you get that if we don’t see distress among current holders or owners? Thanks.

So our credit issues are fairly modest and they usually involve retailers and we have a built-in 85% plus mark-to-market on those leases that we have identified as potential risks. And we have actually captured some of those spreads and already improved our position by buying out those leases or just getting them back and releasing the space in a short period of time. So I don’t think credit is a particularly important consideration in this cycle.

And then the second question on the waltz, extended waltz being necessary for the kind of IRRs we are targeting in acquisitions.

We are using the same lease terms in acquisitions as we always have. If you look at 30 years of history, our weighted average lease term has been between four and a half years and six years on average. So it doesn’t change much.

Yeah. I would just pile on there that we look at these opportunities of whether it be one year to three years or four years of negative leverage as an opportunity, really. We look at total return on every deal. And again, we take it through our filters of quality, mark-to-market and whether we want to hold it long-term or not and then we layer that on with our potential essentials, revenues and synergies and otherwise. So while it’s one consideration, so are all these other factors.

Great. Thanks. I just wanted to follow up on guidance. You touched on this a little bit, but guidance implies a decrease in FFO in the fourth quarter. Can you just talk a little bit more specifically about some of the moving pieces there and one-time items that are influencing the numbers in the third or fourth quarters and whether any of that noise is going to persist into 2024?

To address your question, I don't anticipate any impact into 2024. The $0.03 includes a few cents from termination income related to canceled leases and higher interest income. I would consider $0.02 of that to be a permanent change for the year, while the remaining penny in the quarter is more of a timing issue related to taxes. We expect lower taxes in the third quarter but anticipate higher taxes again in the fourth quarter. If you adjust for the $0.03, it suggests a decrease from approximately $1.30 million to $1.28 million in the fourth quarter based on our guidance. We expect to see an additional $0.02 from base same-store growth quarter-over-quarter, but declines will primarily stem from increased development activity. We are ramping up our investments in land and construction in process. For your modeling, please note that our short-term cost of funding development is around 6%, which is SOFR plus our line rate, while we are capping interest at our in-place debt of 3%. In the short term, this will negatively impact core FFO mainly through increased interest expense. Nonetheless, we anticipate long-term value creation from these investments, although the short-term drag will become more pronounced as development increases.

Thanks. Good morning. Two quick ones here. First, on the utilization rate that picked down a little bit this quarter, I was wondering if you can provide any more color around that. And second, if you look at the larger development landscape and look at competitors that are developing, I would assume that the pressure for them to lease up space and maybe they have to pay back the loans to banks probably increases as we move forward. I am not sure how big these developers are or how much capital they have behind them. But is there any risk that as these developers look to secure tenants that could drive rental rates lower going forward?

Hey, Ki Bin. I will take the utilization question. Thanks for it. As you see on the page in supplemental, there are multiple metrics on the page and we look at all of them in totality and additional ones that are not included in the supplemental. So we have a range of proprietary data, whether it’s our IBI survey, tenants in the market, customer decision-making timeframes, our sales pipeline. Specific to the utilization data, that lags. That does not lead economic and real estate cycles we have seen that over time. And so what I think this is best understood in the context of today’s retail sales numbers, which shows a resilient consumer that is outperforming expectations and leading to lower utilization levels.

Yeah. On the second issue of opportunities, there are a lot of merchant developers that are bank financed and active in the market and they are just about completing their projects now. They have some interest reserve built into their lease-up plans, but their lease-up plans are going to get extended. So actually, I think, what’s going to happen is that they can’t really afford to rent the space at the lower rate. I think they are more likely to sell their positions to people with stronger balance sheets and we have already seen and taken advantage of a couple of instances like this. So don’t be surprised to see us buy some vacant completed shelves at discounts to replacement costs, because of our view on demand and supply, with a 65% decline in supply, we think if you get into late 2024, early 2025, we are going to be in a pretty strong market. So this is where balance sheet matters. This is where quality of location and product matters, and we are going to be very selective about the projects that I described. But that’s why we have been building our balance sheet and keeping our leverage around 20% all this time. This is when we put it to work.

Hi. Good morning. I have a follow-up on an earlier comment about 20% of your markets you are managing for occupancy not pushing rent. So what are those markets where industrial landlords have less pricing power today?

Sure, Vince. We covered a couple of them. I talked about Southern California. I point to Houston, Indianapolis, and then outside the U.S., the softest market might be Poland.

And China.

And I think I’d offer now that market vacancies are beginning to gap out again, I think we are going to see quality make a bigger difference in terms of portfolio mix.

I just wanted to get your thoughts to just clarify one thing more broadly. Two trends, I guess, one, just the whole reshoring team that we are hearing more and more about. And then second, just Amazon as they have put a lot of capital into the coast and across the country. I am just wondering sort of when you marry those two things together, is there sort of greater investment moving towards the Midwest or more manufacturing pockets? Is that an opportunity for PLD going forward?

So, generally speaking, I would say, on where manufacturing is taking place, in Asia, there’s a lot of manufacturing still in Asia. It’s not all in China and it had been gradually declining in China in the last couple of years anyway. It was first moving to western China and then it was spreading to other places in Southeast Asia. But there are going to be strong flows still from those places. It’s just not going to be all from China. But the container doesn’t care whether it’s coming from somewhere else or China. It lands in the same ports. Secondly, demand in our product is mostly driven by consumption and not manufacturing. In manufacturing, the finished product ends up in a container and on a truck or a ship. So the warehouse is a truck or a ship. So that manufacturing per se doesn’t generate a lot of demand. When those containers land in places where consumption takes place, that’s when the demand is generated for deconsolidation. Now those markets happen to be in populous parts of the country, because that’s where the consumption is and those markets tend to be high barrier to entry markets. So we don’t think the dynamic of on-shoring to the extent that it exists is going to change things around all that much. The biggest beneficiary of on-shoring has been actually near-shoring and it’s been in northern Mexico. Northern Mexico markets are 100% occupied and there’s insatiable demand for product in those markets and most of that is for distribution buildings that are used for manufacturing purposes. So that’s where we have seen the material demand. If there’s more demand coming for manufacturing in the U.S., A, we haven’t really seen it and if we do see it, we will be the beneficiary of it because we are well positioned in those central markets as well.

Hamid, just a bigger picture question for you. Can you talk about how you are thinking about managing exposure to geopolitical risk and instability and maybe to what extent the latest turmoil in the Middle East could impact your operations, if at all?

I believe the impact will be indirect, as the Middle East is not a source of our products or exports, and we are inactive in those markets. It will have a secondary effect on the broader economy. If the Federal Reserve continues to be aggressive with interest rates, and we experience a decline in demand due to an escalation in conflict, we could face serious scenarios, like significant oil price spikes. While I wouldn’t wish for such situations, they could, in a relative sense, benefit our business since it would emphasize the importance of inventory and shift companies' strategies from just-in-time to just-in-case. I find it hard to say this would be good, given the tragic circumstances that might unfold, and the potential loss of innocent lives is heartbreaking. However, I’m more apprehensive about the Fed potentially overreacting than about the conflict worsening. Predicting either outcome is challenging. Thank you for your questions, and we look forward to seeing everyone at our upcoming Investor Day, which promises to be insightful.