Prologis Inc (PLD) — Q4 2023 Earnings Call Transcript

Thanks, John. Good morning, everyone. Welcome to our fourth quarter 2023 earnings 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. 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 fourth quarter earnings 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'll hand the call over to Tim.

Thanks, Jill. I'd like to start our call by recognizing and thanking our team for the incredible effort given over 2023. While it was a turbulent year in many ways, we ended it by delivering nearly 11% earnings growth and driving our 12-year earnings CAGR since merger to 10.3%. We deployed over $7 billion into new investments, raised nearly $2 billion of strategic capital in a very challenging environment and delivered excellent operating results while serving and growing customer relationships. We're also appreciative of the opportunity we had at our Investor Forum last month to share our vision and outlook for the company over the coming years. The environment is setting up in line or better than our expectations with development starts across the market continuing to decline by two-thirds from peak and an improvement in customer sentiment that appears more constructive than just 90 days ago. That said, we still see challenges in some submarkets as near-term outsized deliveries are met with still recovering demand. But our thesis remains the same as we've been describing for over a year and detailed last month in New York, which is that the supply cliff will converge with normalized demand later this year, delivering an environment conducive to strong market rent growth. We believe that annual market rent growth will average between 4% and 6% over the next three years, with 2024 being modestly positive and ramping thereafter. Turning to our results. We finished the year strong with quarterly core FFO, excluding promotes of $1.29 per share, bringing the full year to the top end of our guidance $5.10 per share. While market occupancy declined by approximately 100 basis points, our portfolio gained 10 basis points to end the year at 97.6%. Net effective rent change over the quarter was 74%, bringing the full year to a record of 77%, with another impressive set of results out of Southern California at over 150%, a reminder that it remains the strongest market for cash flow growth despite near-term fluctuations given the large quantum of its lease mark-to-market. In the end, same-store on a net effective basis was 7.8%, while cash was 8.5%. We started over $2 billion of new developments in the quarter across 46 projects in 27 markets with nearly 50% of the activity in build-to-suit. In Energy and as seen in our new supplemental disclosure, we stand at year end with approximately 515 megawatts of solar and storage in operation with an additional 70 currently under construction. We had a quiet quarter on the financing front, raising approximately $300 million, but our full year of activity closed out at over $12 billion at a weighted average rate of 4.5% and a term of 10 years. Our total debt portfolio remains at an overall in-place rate of just 3% with more than nine years of average remaining life. Turning to market conditions. The increase in fourth quarter market vacancy was in line with our expectations and driven by demand that remained moderate as customers exercised caution in their spending, while completions hit an all-time high. Development starts, however, have continued to fall across the U.S. and Europe, extending and deepening the future supply shortfall. On the ground, our teams are seeing revived customer interest with healthy showing activity to start the year. This includes build-to-suit inquiries, which we expect to remain active for Prologis following a strong year in 2023. Our proprietary metrics point to normal levels of activity with proposals and gestation timing in line or a bit better than historical norms. Utilization declined in the quarter to approximately 83% and keeping with this morning's report, a decrease in the inventory to sales ratio. We view this positively because utilization also increased from here as stronger than expected retail sales over the fourth quarter and holiday season drove lower inventories, which will need to be replenished. Turning to market rents. Our global view is that rents declined this quarter by 90 basis points, but predominantly impacted by an estimated 7% decline in Southern California. Our full-year view is that global market rents grew by 6%, just below our expectations, ultimately driving our lease mark-to-market to end the quarter at 57% after capturing approximately $100 million in realized NOI growth from leases rolling up to market. The outlier on rent growth is clearly Southern California. While our portfolio was only 2.6% vacant at year-end, growing availability has made leasing very competitive. Combined with a 110% increase in rents since 2020, the rent retracement is understandable. Historically, there has never been a market where the delta between expiring and market rents has been so large that it provides ample room for property owners to deviate from market in order to attract customers. But looking ahead, the positive news is that we are launching two trends in reverse. The first is that the supply pipeline is clearly emptying with little in the way of new starts. And the second is that the escalating issues in both the Suez and Panama canals together with the resolution of the West Coast labor negotiations are moving shipment volumes back to the West. While this bodes well for Southern California and we're still early, we are watching East Coast port markets more closely. In any event, all of these disruptions are reiterating the underlying need for resiliency and the just-in-case approach to inventories. Summing all of this up globally, we recognize the high volume of near-term deliveries that need to be absorbed into our markets over the next few quarters. But we are very pleased with our ability thus far to build occupancy, drive rents, and illustrate more differentiation in our portfolio as market vacancy grows. As for Strategic Capital and valuations, we saw U.S. values decline approximately 5.5% during the quarter, which was our expectation and the reason we paused our appraisal based activity, which includes calling and redeeming capital as well as asset contributions. We run an industry leading franchise in which we aim to set the standard for governance, including timely, accurate, and independent valuations. Calling out when pronounced lags and valuations emerge has protected investors and demonstrated how we stand apart as a responsible partner. With this quarter's value declines in a more stabilized rate environment, we'll resume activity in USLF including the funding of our $250 million commitment announced in the second half of '23. Turning to guidance and all at our share. In terms of operating metrics, we are guiding average occupancy to range between 96.5% and 97.5% with occupancy likely to step down in the first quarter and rebuild over the course of the year. Cash same-store will range between 8% and 9% and net effective same-store growth will range from 7% to 8%. We are forecasting net G&A to range between $420 million and $440 million and Strategic Capital income to range from $530 million to $550 million. We have a very big year of stabilization activity ahead of us with a range of $3.6 billion to $4 billion, and expected yields of approximately 6.25%. On the new deployment front, we are guiding development starts to range between $3 billion and $3.5 billion with the estimated build to suit mix of 40%. And we plan to take sale portfolios to the market over the year with expected proceeds to range between $800 million and $1.2 billion and additionally forecast $1.75 billion to $2.25 billion in contributions to our Strategic Capital vehicles. In the end, we are forecasting GAAP earnings to range between $3.20 and $3.45 per share. Core FFO excluding promotes will range from $5.50 to $5.64 per share, while core FFO including net promote expense will range between $5.42 and $5.56 per share, each a bit higher than our preliminary guidance at the Investor Forum. While we do not forecast any promote revenue at this time, there are some small opportunities that do exist in FIBRA Prologis and our new PJLF vehicle in Japan. In closing, we know that the market is not yet out of the woods with regards to incoming supply, but the combination of a stronger backdrop, continued low levels of starts, and a calmer capital markets environment has us optimistic that 2024 will be another great year. As you know from our Investor Day, we have many initiatives in flight designed to add value beyond our real estate and because of our real estate. We look forward to continuing to execute on our plan and providing you updates throughout the year. And before we move to Q&A, I'd like to get ahead of questions which have grown a little more frequent in recent quarters surrounding market rent growth. Unintentionally, we set an expectation that we could forecast market rents to a single point of accuracy in increasingly short time periods, and honestly, we're just not that good. We've gotten away from a practice that was originally aimed at being high level and directional. So what we've elected to do in order to help investors without perpetuating the issue is to simply provide high level rent growth expectations on a rolling 12-month forward view. As mentioned earlier, in terms of our three-year CAGR of 4% to 6%, we believe we'll see modestly positive rent growth aligned with inflation over the next 12 months and we'll continue to update this rolling view on our future calls. With that, we will now take your questions.

Excellent. Thank you. Kind of, maybe taking a look at your leasing spreads, obviously very strong performance during the quarter, but also a big spread between Prologis share and the kind of overall portfolio performance, which suggests a stronger performance out of the U.S. Going forward in the '24, are you expecting this gap in performance to tighten at all or should the U.S. continue to lead the way as far as spreads go this year?

I'll take that. I think, Tom, that it will actually be relatively similar. There's a pretty long tail on how the lease mark-to-market is going to affect quarterly rent change. It will sustain for quite a while in other words. And since it's much more pronounced in the U.S. than anywhere else in the world, I would expect we do see that continue to stay wide.

Hey, just two quick ones from me. So one, we've been looking at a lot of the broker reports talking about rising availability rates. You guys have flagged it as well. So just curious what you guys are seeing in sort of the Sun Belt markets versus sort of the Coastal. And if that's trending sort of in line or with your expectations and so forth, would be the first. Thanks.

Hey, it's Chris Caton. I'll take that. The year ended with market vacancy rates in the mid-5% range, as Tim mentioned, with lower vacancy rates on both the East and West Coasts and higher rates in the Sun Belt. We are observing that pricing and rent growth in the Sun Belt markets have been stronger than in the coastal areas in 2023.

Great. And if I could just follow up on the market rent growth comment. I think you said, rolling 12 months sort of inflationary plus or minus. So, clearly, that's implying sort of an acceleration in '25 and '26, as supply comes down to that. Is that sort of how you guys are thinking about it?

That's exactly right.

Great. Thanks. Two quick ones here. I guess, first question would be, could you guys just go through what the uptick in property improvements in the CapEx section were? There's a pretty big jump in 4Q versus prior quarters. And then just second, Tim, you had kind of touched on this that tenant sentiment is improving here and there may be better traffic going back to the West Coast with everything going on the Red Sea, and the realization that just in case maybe a more prudent inventory method. But I'm just kind of curious because big tenant leasing has been kind of slower over the last 12 months to 18 months. Are you seeing any early green shoots on that improving as you guys are talking with customers?

Yeah. I'll take the first part here, Craig. On the CapEx, if you take a look at the supplemental, I'd first start by widening out on overall CapEx before staring at property improvements and there is just a good example here of the need to look at annual or trailing numbers as this can be a pretty volatile number quarterly. Here, you can see on the full year as a percentage of our NOI, we are about 14%, roughly 15% the prior year. And yeah, focusing in on property improvements, I'd suggest the same that you have to look at a trailing basis. We do tend to see higher levels of property improvement activity in the fourth quarter, just by nature. But we are catching up on the full year. You can see we averaged $0.12 on the year versus the $0.21 that we had in the quarter. So that's really just a timing issue. One more thing that you can see here is the year-over-year averaged on that basis $0.12 versus the prior year $0.10, and I'd explain that differential as just some inflationary piece. And then, the second would be some deferred maintenance and work that we're executing on the Duke portfolio.

And maybe this is Dan. Craig, regarding the second part of your question about tenant sentiment, I would say that during the Investor Day, we mentioned a slightly improved tenant sentiment compared to the Q3 earnings call. I can now say it's even slightly better in the last 30 days. This is driven by our strong proposal volumes, and our customer conversations have been robust. Currently, 45% of our available space is under discussion with active proposals. Additionally, we've had several discussions with our customer-led solutions group. Our build-to-suit conversations are also improving, and our overall build-to-suit pipeline has expanded from the previous quarter. Whether this is related to the Red Sea and Canal issues or not, I believe Chris will share some insights on that.

Yeah. I'll just go further, Craig, as it relates to port activity. We went out on a limb in September with the published research report calling for recovery in market share and that is really, really playing out in the port activities. In November, West Coast ports were up 24% year-on-year, inbound shipments are up even more and that will translate to leasing over time.

Hi. Good morning, team. Tim, earlier you mentioned how development starts are down maybe two-thirds from the peak, and that you're seeing little in terms of new starts broadly. When we look at your own build-to-suit split of development, it is up year-over-year and then that earlier question just on customer sentiment. So, I guess, combining all of those pieces, how do you think that impacts your decision to do spec development versus build-to-suit over the course of this year?

Caitlin, this is Dan. I'll respond here. A few thoughts for you. First of all, we started just over $1 billion worth of spec in the fourth quarter. So, we had talked over the last several quarters about the decline in starts in the marketplace and that's when we wanted to come out of the gate here with some starts and that's what you're seeing us do right now. We have a pretty healthy guidance here for the 2024 starts, at owned and managed of about $4 billion. And if you think about it, that's 25 million square feet or so of starts that we could be doing this year. And we have a development portfolio right now of about 50 million square feet. So, we've got an appetite for spec. Our build-to-suit volume we think is going to shake out in that 40% range as we've projected. And then keep in mind, we talked about this plenty at the Investor Day, we have $40 billion worth of opportunities in our land bank. And we have the ability to make decisions on a quarterly basis where we're going to build. We own this land in 50 markets around the globe, 300 different sites. So, plenty of opportunities there.

Thanks, and good morning. I wanted to discuss the development start guidance of over $3 billion this year. Could you help us break that down between traditional industrial and other property types, like data centers? Also, does the expected pre-lease percentage vary significantly? Lastly, typically, how long does it take for data center developments to start generating cash flow?

Sure. Ki Bin, this is Dan, I'll hit that. First of all, we gave some guidance on our data center business 30 days ago at Investor Day. We talked about over the next five years, 20 or so opportunities, 3 gigawatts of data centers, $7 billion to $8 billion worth of investment. Those numbers have not changed. As a matter of fact, one thing we couldn't disclose at Investor Day was, we started over $500 million worth of data centers in the fourth quarter alone. You won't see us guide to data centers. These are very lumpy deals. And if you think about our data center opportunities, we own over 5,500 buildings. We own or control over 12,000 acres globally. So we have one of the most important components of data centers. We control the land, right? We talked about power applications at Investor Day. We talked about a number below 50, that number is now approaching 60. Our team is very active in growing that data center pipeline. Then the third component of it would be customers and we're talking to the big hyperscalers on a regular basis. And we think it's prudent for us to be careful on how we project out what our data center volume will be because there is a competitive nature to this as well. We're negotiating with these customers and we think it's important for us. So we will absolutely share with you when these projects are on the horizon. But right now, our start volume is largely industrial. And then keep in mind, our data centers business is a part of our long-term higher and better use business we're going to build. We're going to merchant build these and we're going to recycle that capital into the business we love so much, which is logistics.

Yeah. So your question about how long it will take them to cash flow and there is a wider range than traditional industrial. But I would say on kind of powered shell, it's more in the 12 to 15 month range from start. And on turnkey, depending on who does it and whether the customer does it or we do it, it could be longer than that by about a year, because since the installations are pretty complicated to get these going. But all of that is built into the budgets and the economics of the transaction. And this point that Dan made on the negotiating posture is really important. I mean, the last thing we want to do, there are four or five customers out there and it's pretty obvious given the scale of the numbers they can figure out which project is in our guidance for the next quarter if we wanted to go in that direction, and that basically reduces our leverage. So we're just not going to do that.

Hey, thanks. Good morning. I was wondering if you could just provide a little bit of commentary on the supply and demand trends over the next couple of quarters. You previously said that you think deliveries will outpace demand for the next couple of quarters and then the inverse will happen after that. So just any update on that would be great.

Hi, Jay. It's Chris Caton. So we project 250 million square feet of net absorption in the calendar year and 285 million square feet of completions. And yeah, that's going to be front-end loaded, particularly on the supply side. And so we think you'll see the vacancy rate rise by another 50 basis points to 75 basis points here in the first half of the year, peaking at 6% maybe 6.1%, and then making a meaningful move through the subsequent rest of the year and into 2025 and 2026 based on the trend in starts that we've profiled for you.

Let me just punctuate that, the vacancy rates will go up through the second quarter. So don't be surprised by that. But we're pretty confident they'll come back down after that.

Thanks. I just wanted to go back to the space utilization comment you made, Tim, about feeling that at this point retailers like we have to restock inventories. So this is actually a good sign where space utilization is. I guess, I'm wondering, if you could give us some reminder sort of seasonally how this may play out historically in terms of leasing demand picking up from 3PL or retailers because of that issue of restocking? And then, as well in terms of the lease proposals picking up in the fourth quarter, if you had any benefit already from that industry, or even anecdotally, you could talk a little bit about the discussions there. Thanks.

The straightforward way to understand this is that the absorption and demand for our product follows a sequence that is heavily weighted towards the fourth quarter. Historically, a significant amount of activity happens in that quarter, primarily driven by anticipation for the Christmas season, which results in greater volatility during that time. This year, our retail sales, especially in e-commerce, exceeded expectations. After experiencing inventory shortages in 2021 and being overstocked in 2022, retailers are now being cautious with their inventories, leading to another round of inventory shortages. This inconsistency has always been an issue, making it difficult to find the right balance. The positive aspect is that this Christmas season proved to be stronger than expected, though it will take time for the situation to normalize.

Great. Thanks. Can you just talk broadly about valuations in cap rates? And given the continued movement in the 10 year, I guess, do you think that pricing is adjusted correctly or could we see continued volatility in the near term? And I guess does that potential volatility present you with any investment opportunities?

Yeah. We don't think the real pricing and real returns have really changed because a return expectation should have been higher six months ago because the higher treasury rates. But nobody was trading based on those higher return requirements. So nothing really happened. So it was a theoretical decline in values. I think with the treasuries now having come down, I know they've gone up a little bit just most recently, but net-net, they're down. I think the reality is the expectations of the market participants and the theoretical pricing of assets is converging. Bottom line, we think we're seeing the near bottom valuations, both in the U.S. and Europe. And I think with this level of stability and sort of bottom forming, you'll see more volume coming through in terms of real deals.

Good afternoon. Thank you for taking my question. I have another supply-demand question. As we consider the decline in new deliveries expected in the second quarter, is there a prolonged period where we will need to lease these up? With the anticipated improvement in supply and what you're observing on the demand side, will this occur through the third quarter and into the fourth quarter, or will it happen as soon as the deliveries taper off? Thank you.

Hi, it's Chris. I'll start by saying that the vacancy rate is expected to rise to 6%. Hamid and I, along with the entire team, are aligned on this. It's important to note that this is still a relatively low rate compared to historical levels. While it will take some time for the vacancy rate to decline and absorb the available space, it will transition from a low level to an even lower one. Therefore, we're anticipating that the vacancy rate will decrease from 6% to about 5.5% and possibly down to 5%, considering the significant drop in supply that we are witnessing.

Let me just punctuate that, the vacancy rates will go up through the second quarter. So don't be surprised by that. But we're pretty confident they'll come back down after that.

Hi. Good morning. Your outlook for development stabilizations is quite positive despite the supply environment remaining elevated for the first half of this year. So could you just expand on what the expected timing is around for this? And then, if you can just follow up a little bit more on your comments around tenant inventory. What are they telling you in terms of how they plan to adapt to any persisting disruption around East Coast ports? Thank you.

Camille, this is Dan. I'll start with your question on stabilization. It is a big year on stabilizations for us. We actually started the year out with some good news. Late December, we actually pulled in four stabilizations that we had expected to happen in the first quarter of 2024. But overall, the timing of those stabilizations, it's spread out pretty well throughout the year. And one number I would just point to is, that 2024 stabilization volume is 46% leased already, which is actually 300 basis points, 400 basis points above the average at this point over the last several years.

Hey, Camille. It's Chris. I want to jump in on the disruption of the ports. We are really just now seeing the diversions related to disruptions in both Panama and the Red Sea and Suez. And so, it's a bit early for us to see real medium-term leasing decisions in response to these disruptions. But number one is the clarification or the ratification of the labor agreement on the West Coast is providing a clear landscape for decision-making and engines of growth are beginning to kick in in Southern California.

Let me make that point a little stronger. I think all this concern about LA is over, and it hasn't shown up in the numbers yet, but it will in the next six months. So, I don't think we'll be sitting here on calls like this worrying about LA and its absorption. Now, will we worry about something else? I'm sure we will. I don't know whether that's going to be the East Coast or Houston or whatever. But yeah, I mean, you've seen two big movements. It's not just Suez, it's also Panama Canal and the water issues there. And the expense of shipping stuff through the canal is leading to more reversion back to the normal way of doing it, which is getting it to LA and then land, bridging it over, but there could be other disruptions. It could be something can blow up in the Persian Gulf. So it's very hard to predict those things. The big message is this, we can spend a lot of time guessing as to what the share of West Coast is, East Coast is, all of that. The point is, people thought COVID was the big unknown factor. And now that COVID is over, the world is going to go back to a stable, predictable, just-in-time type of inventory strategy. I think each one of these things, whether it's Panama, whether it's Suez, whether it's in the Middle East, whether it's something in the Persian Gulf will remind people that they generally need to have a more conservative inventory strategy. And that's the big long-term driver which is going to be a tailwind for demand that we haven't really seen play out just yet. We're pretty confident that will.

Yeah. Hi. Do your comments about seeing revived customer interest apply to big-box leasing as well?

Yes. In fact, I would say some of our largest customers are showing signs of positive change. They are shifting away from a cautious approach since they have delayed decisions for as long as possible while expanding their networks, especially in e-commerce. Given that the economy has not declined as dramatically as expected a year and a half ago, they seem to be cautiously re-engaging, and as a few take action, I believe others will follow suit. So, it appears that the big-box retailers are starting to emerge from their cautious stance and are ready to occupy space again.

Thank you. Regarding your comments on Southern California and the 7% decrease in rents, can you provide similar insights on New York and New Jersey? This market has experienced a more significant sequential decline in occupancy, and you're mentioning challenges related to port volumes and the canals.

We are not going to get into quarterly rent forecasts and we're not going to get into market-by-market forecasts. We run a 1.2 billion square foot business. And I think we already, in terms of a company of our size and disclosure and details, are definitely in the 99th percentile. And we just don't have that ability. So we're not going to put some numbers out there that we can't be certain of. So, if you don't mind, just let's stay away from that fine level of dissection beyond our ability.

You mentioned earlier about some technical difficulties. At your Investor Forum, you indicated that you expected ex-U.S. markets to perform better than the U.S. in terms of market rent growth. Is that still the case? Additionally, could you highlight some markets you have become more optimistic about in the last 30 days? Thank you.

Hi. It's Chris. Yeah. Indeed, we saw international outperform in the fourth quarter. Our view is that it'll outperform in 2024. And there are a wide range of international markets that are enjoying really strong market rent growth. Latin America, both Brazil and Mexico. Turning to Europe, probably Northern Europe is the strongest, and then here in North America, Toronto is a market that's also enjoying outsized growth.

Yeah. The UK is outperforming too.

Hi. Thank you for taking my question. I have two quick ones. First, Chris, regarding your comment about 250 million in demand for 2024, could you clarify the actual number for 2023 that you are comparing that to? Additionally, how long does it typically take for the leading indicators to convert into leases? That's my first question for understanding the trajectory. Secondly, could you provide specifics on your expectations for cash rent spreads and the current mark-to-market status of the portfolio? Thank you.

Hey. It's Chris. Thanks for the question, Vikram. I'll take the first one. So, 250 million square feet of net absorption in 2024 compared to 192 million square feet of net absorption in 2023. And we consult a wide range of leading indicators, some of which are contemporary and some that have a nine months to 12-month lead.

Vikram, it's Tim here regarding the lease mark-to-market. I want to emphasize that I don't particularly value the cash perspective on lease mark-to-market due to some issues it presents. To address your question, we observed a 49% figure by the end of the year. I expect to see significant variation in cash to net effective rent spreads because rents have been notably high and increases have been substantial, around 4%. So, approximately...

And also Duke.

Duke is a factor as well, of course. So, the roughly 20 to 25 points that we've been seeing lately, I expect we'll see mostly continue into next year.

Hi, thanks. Just wanted to ask about capital deployment, two questions actually. First, can you talk a little bit more about the acquisition pipeline today and whether you are seeing an increase in seller interest to transact more deals coming to market and more product hitting the market? And then second, the spread between stabilized yields and cap rates for both development stabilizations and new starts narrowed in the quarter, can you talk a little bit about that trend in spreads and what we might expect in '24, particularly as you move forward? Just given the mix of build-to-suits in spec developments and some of the higher and better-use projects that you're ramping up on.

Todd, this is Dan. I'll respond to your questions here. First of all, yes, is the quick answer to your first part of the question regarding the acquisition pipeline. Our teams are out there, turning over every stone, but it was a low-volume year in the marketplace last year and I expect that to be much, much higher this year. So, very strong acquisition pipeline. And then spreads on the stabilized yields in our development portfolio, yeah, we've been talking for the last several quarters about that tightening. I remember five or six quarters ago talking about cap rate expansion and that spread tightening and what that would do to impact overall development portfolio. And that really just has to do with the cost of capital, volatile capital markets and who knows where that's going to go from here. It's certainly going to have something to do with the tenure and what the tenure does and the volatility in the capital markets. But overall, we build in forward risk in our overall development portfolio for the numbers that you actually see in that spread. Go ahead, Tim.

Yeah. I'll just highlight, I think if we look at the development portfolio, see the margin they are estimated at 22. Historically, that's still a very good margin. And under conservative, underwriting assumptions, I would remind everybody we've got inflated costs to carry. And there we've got longer lease-up times and things that we expect that will be. So I am pretty confident we'll be several points above that estimated margin anyway.

Yeah. Thanks. I guess, maybe Chris, can you provide some color on tenants' mindsets to adding more inventory? I mean, is it fair to say that tenants, or at least some tenants have delayed these decisions over the past year just due to the macro uncertainty? And what do these change customer discussions change at all given the holiday season that you kind of highlighted and how they didn't have enough inventory levels? I mean, has that been changing, are they ready to make those investments today?

Hey, Mike. It's Chris. I think you might have answered your own question, totally agree with the sentiment in the direction you're taking it. And there's likely to be a different posture going forward. And then I'd also look, propose that you can also reach out to them and get their feedback.

Yeah. I bet you that answer is, they have no idea. I mean, it's just been since 16 days, right? 16, 17 days since the end of the year. Many of them haven't even added up their numbers and I think those guys don't come out with earnings releases until much later. So with Michael's question, that was the last one. I wanted to thank you for not only this call but also attending our Investor Day, we got a lot of great feedback from you and we'll make these things better and better over time and look forward to talking to you next quarter, if not before. Take care.