Prologis Inc (PLD) 2024 Q3 法說會逐字稿

Greeting and welcome to the Prologis Q3 2024 earnings conference call. (Operator Instructions) And as a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Justin Meng, SVP, Head of Investor Relations. Thank you, Justin. You may begin.

Thanks, John, and good morning, everyone. Welcome to our third quarter of 2024 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 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 and other SEC filings.

Additionally, our third 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; Dan Letter, President; and Chris Caton, Managing Director, are also with us today.

With that, I'll hand the call over to Tim.

Thank you, gentlemen, and welcome to everybody joining our call. Before diving into, I'd like to share our concern for those affected by the recent hurricanes in the US and Europe that impacted our employees, customers and communities. Thankfully, our teams are safe and their proactive customer outreach and assistance has been outstanding. Our property sustained limited damage for such strong storms.

Overall, we are pleased with our operating and financial results as the third quarter played out to our expectations. Well occupancy and rent softened against a backdrop of positive yet subdued demand, we continue to deliver impressive net effective rent change due to the still powerful lease mark to market embedded in our portfolio, which bridges us through this soft patch to the next cycle of rent growth.

Turning to the quarter, core FFO, excluding net promote expense, was $1.45 per share and included net promoters was $1.43 per share. These results were slightly ahead of our forecast and the quarter included approximately $0.03 of income from a Prologis ventures exit. Period ending occupancy was 96.2% of our share, nearly 300 basis points above the market as the flight to quality continues. Net effective rent change was 68% and cash rent change was 44%. We captured over $90 million of an ally by rolling leases up to market.

The portfolio produced net effective in cash same-store growth of 6.2% and 7.2%, respectively. Revenues were impacted by approximately 35 basis points of bad debt, which is elevated from our normal 15 to 20 basis points. While bankruptcy filings are on the rise broadly, the good news is that the space we've taken back as a result has had embedded rental upside of over 60%.

Our overall portfolio, lease mark-to-market finished the quarter at 34%, representing $1.6 billion of potential NOI. Finally, on the balance sheet, we raised $4.6 billion of new debt across Prologis center funds had a weighted average rate of 4.6% and the maturity of approximately nine years.

In terms of deployment, we had a very active quarter. We started over $0.5 billion in development projects, including incremental capital to an existing data center development now pre-leased to a hyperscale customer with a turnkey buildout. We expanded our land bank, driving our potential development opportunity over $40 billion, which now includes our first two projects in India that support over 5 million square feet of new development.

We deployed over $1.4 billion in third-party acquisitions. Here to date, we have acquired over 14 million square feet of strategic assets at an estimated 20% discount to replacement costs. We started building on 54 megawatts of new energy systems. Our momentum here is building, and we continue to have and we expect to have generation capacity well over 600 megawatts at the end of this year, with good line of sight to our 1 gigawatt goal by the end of 2025.

As mentioned, Prologis ventures had a successful exit of an early round investment in the Japanese workforce solution, Timee. This produced a 9 times multiple on our investment, realizing a 65% IRR. Beyond the economics, our strategy and supply chain venture investing has delivered valuable insights for Prologis and our customer.

Finally, FIBRA Prologis, our strategic capital vehicle in Mexico, successfully closed a tender for the shares of Terrafina, which is now owns nearly 80% enhancing its leadership position in one of our best performing and highest growth global markets.

Turning to the operating environment, condition remained soft in many of our markets. And as we've described over the last few quarters, this is despite healthy GDP and consumption growth. We ascribed a weaker relationship between economic output and industrial absorption to the availability built into the supply chain through COVID, originally earmarked for resiliency, but now available to operators as a source for cost containment.

But ultimately, the ability to rely on this axis is diminishing as utilization reaches a level that will force decision making and expansion, the pace of which will vary by market. Many customers are making progress in reducing this capacity through growth, while others are gaining efficiencies through consolidation. In the end, it's all serving to hold net absorption below pre-COVID levels impacting rents. Globally, we estimate that market rents decreased approximately 3% this quarter and roughly half this amount when excluding Southern California.

As we noted before, Southern California will take the longest to reach equilibrium. While activity has improved the remaining amount of excess capacity will simply take time to work through. That said, it's important to keep this context. Our [SoCal] portfolio generated 84% rent change on commencements this quarter, even as it led the globe in market rent decline, a great example of the interplay between the spot reduction in rents against our lease mark to market.

This has us well-positioned to navigate the cyclical downturn and taking it a step further, we see the structural investment case for SoCal is strengthening with new supply barriers that come into effect from recently enacted legislation and continued focus on carbon emissions.

As always, the rent picture is mixed and there remain many markets that are either flat on rent or positive such as Houston, Atlanta, Nashville, Northern Europe, and of course, [that] TAM remains very strong. Overall bottoming process is underway and we expect demand to remain soft in the near term. Looking ahead, market vacancy is at or near its peak will hover there as utilization improves and global rents will bottom sometime mid next year.

It stands to reason then that the near term growth will be affected by the path market rents and occupancy have already taken. We remain very positive on the outlook for our business as vacancies are still low in the context of history, starts are down significantly, and supply deliveries are falling below their pre-COVID levels. Additionally, with replacement cost rents approximately 15% above today's market, even with land values mark down by a third from their peak, the long-term growth trajectory remains highly favorable.

Moving on to capital markets, we've seen improved pricing and activity in the transaction market. And values continue to grow. US and European values again increased approximately 1% in the quarter, and Mexico saw an impressive 2.2% with a bottom's seemingly in our strategic capital business had its most productive quarter in the last two years, raising unmet $460 million.

Overall, it appears private market sentiment is stronger than the public markets. During the quarter, transaction volumes increased an unlevered IRRs compressed another 25 basis points. In terms of guidance, which I'll review at our share, we are tightening our forecast for average occupancy to a range of 96% to 96.5% and also tightening our forecast for cash same-store growth to a range of 6.5% to 7%.

Our net effective same-store growth is for a range of 5.5% to 6%, which has been tightened and reduced modestly at the midpoint for the increased non-cash write-offs we expect from higher bankruptcies in the balance of the year.

We are tightening and slightly reducing our G&A guidance to a range of $415 million to $425 million and tightening our range for strategic capital revenue to $525 million to $535 million. We are reducing our overall development starts guidance to a range of $1.75 billion to $2.25 billion, which reflects both slow decision making and build to suits and disciplined on our part in deferring new spec development and amid stubborn demand.

Of course, we are the best position to react quickly as conditions warrant with approximately $8 billion of pad ready development opportunities. We see attractive acquisition opportunities in the market and are increasing our guidance here, seeking our range up to $1.75 billion to $2.25 billion. And finally, the forecast for our contribution and disposition activity is increasing to a new range of $3 billion to $4 billion, reflecting the improving transaction market and strong your fund raising and strategic capital.

The positive spread between our buying and selling IRRs year to date has been approximately 100 basis points. Putting that altogether, we are increasing our GAAP earnings to a range of $3.35 to $3.45 per share. Core FFO, including net promote expense will range between $5.42 and $5.46 per share, while core FFO excluding net promote expense will range between $5.49 and $5.53 per share or $0.01 increase from our prior guidance. [For FFO], obviously excludes our development gain guidance, but it's noteworthy to highlight our increased to a new range of $375 million to $425 million.

In closing, we had a very productive quarter in which we delivered strong operating results, high occupancy, high rent change, and meaningful same-store growth in the challenging market environment. Alongside that performance, it's clear that we are focused on the future as evidenced in our very active deployment standing our global reach and product offering.

This company is well positioned to capitalize on the structural demand for logistics, real estate and our focus on operational excellence, customer centricity, and value creation will continue to drive strong performance across all market cycles. Consistent with this drive for excellence, I'd be remiss to not highlights our annual GROUNDBREAKERS form, which we just held in London. It featured some of the most innovative companies of our day, and we heard from the likes of the legendary Fred Smith of FedEx and sir, Tony Blair amongst many others.

GROUNDBREAKERS deepens our customer relationships and builds upon our thought leadership across the supply chain and its emerging foundation for clean energy and digital infrastructure. It's great to see so many of you there, and a replay of the event is available on our website.

With that, I'll hand the call back to the operator for your questions. Unfortunately, Hamid is feeling under the weather today, and while he is on the call, you may be limited in his responses. Operator.

(Operator Instructions)

Tom Catherwood, BTIG.

Thank you and good morning, everybody. To Tim, you noted mixed signals and industrial markets. Vacancies are up obviously. Customers are taking longer to make decisions. And on the macro side, obviously, we see if the consumer continues to be stretched. But you also noted, there were strong leasing activity in Q3. You raised acquisition guidance now for the second straight quarter.

So kind of how do we square these two kind of seemingly divergent topics together? And what do you think it takes for customers? What kind of catalyst it takes for customers to move from hesitant when it comes taking space to more active as we move into '25?

Thanks, Tom. Thanks for the question. And if I just start with the acquisitions guidance, I would probably read that as our confidence in the long term for starters. We're very engaged in the business. We are very much looking at markets that we seek to build additional scale and deepen our presence. And our teams are scouring the market in that regard looking for opportunities.

One thing implicit in my remarks that I'd like you to really here is we're not really a buyer at market IRRs. We are typically looking for unusual constructs of market deals, deals that we source where we're looking for a premium to [premium] IRR, such as those who've seen our appraisals. So take that as you are looking at our activity in the acquisitions market.

In the near term, we just recognize that utilization has really been the culprits of keeping a lid on demand. And the message we're trying to send here is that, that has an end to it. Ultimately, customers will work through what's available to them, and it's going to be sort of a spillover out of utilization into growth and occupancy.

Thank you, Tom. Operator, next question.

Vikram Malhotra, Mizuho.

Good morning. Thanks for taking the question. I guess just maybe another one to perhaps square. You talked about the bottoming process in the call in the press release, I guess bottoming not bottom, but do you mind sort of squaring that with two things? One, just your updated view on market rent growth over the next 12 months and two, some just reducing development starts. I thought the plan originally was to keep starts high so that when the market inflex in '25, you sort of have the product ready, can you just square that bottoming in those two things? Thanks so much.

Yeah. Thanks, Vikram. Let me start with your first question, which was squaring the rent growth in the near term here. And let me highlight that we are near or in an inflection period right now. And this is a time when forecasts have very high variability. So the quick answer to the near term view on rents is pretty much in line with where we were 90 days ago. Customers are very engaged, but they're just not making decisions. So we expect this softness in rents to continue throughout this period.

But when we actually think about this is for the long term, 90% of our leases roll after the next 12 months. So even if rents fluctuate minus 3%, plus 3%, it doesn't really matter. It won't have significant impact on our long-term earnings nor the value of the business. And the real driver for rent growth is replacement cost to rents, which Tim said in his script, replacement cost rents are 15% higher than today's market rents.

So the gap between the market rents and the replacement cost rents will ultimately lead to this rent growth. And so if you think about us being at a peak vacancy or close to peak vacancy, which we expect to endure for a certain segment portion, maybe throughout '25 with a recovery in that vacancy emerging late next year and then accelerating thereafter.

So we know the trend and we'll capture that rent growth in the longer term. We just don't necessarily know the slope of that recovery and it's really hard to peg that. And honestly, when it comes down to it, guessing on the short term has never been one of our strong suits. We're running Prologis for the long term.

And the second part of your question had to do with our development starts. Development starts -- so we pushed those off -- Tim talked about discipline in the script here. Build-to-suits, while the pipeline remains pretty strong, it's just flat. Feel like for the last four quarters, we've been talking about customers kicking the can down the road. That's continuing and those build-to-suits are just moving into next year. And then from a spend perspective, we are going to maintain that discipline that we've always maintained.

We don't want to be building into the market fundamentals in many of these markets today, but that's not a categorical. So for example, this quarter we are actually started two buildings in Atlanta. Atlanta is headline vacancy is 9%. But then we look at the infill sites that we have with no competition. We're only 150 basis points vacant. They don't have any spec risk, so we decided to move forward to that. So we move forward with that building or those two buildings, so we could be building into those dirt of completions a year out, like we've been talking about doing.

So it is happening here and there. We just see that accelerating more in the coming quarters. And then let me finish with the fact that we have a very large development book right now, [5.5 billion] under way on a Prologis share. And that's 33 million square feet of development underway. And then we also had $40 billion worth of opportunities right now in our land bank. And so and actually 30% of that land is entitled ready to go. And then two-thirds of that is actually pad ready, which means we really truncated the timeframes to go vertical with those sites.

So we're going to be able to execute the strategy just like we talked about over the last several quarters. We're just -- you're going to see that happen a little bit later.

Thank you, Vikram. Operator, next question.

John Kim, BMO Capital Markets.

Thank you and good morning. So it's looks like a $0.06 beat on a core FFO this quarter. I think, Tim, you mentioned part of that was the Prologis ventures exit that you had. And also on our numbers, you had better than expected currency gains and income taxes. I wanted to make sure that was the case, but also why only raised full-year guidance by [$0.01] given the peak you had during this call quarter?

Hey, John, thanks for the question. I would say you'll see it as a beat. We don't see it as a beat. These are events that we were forecasting for the year and for the quarter. And I would also highlight that the FX gains I think you're seeing in the P&L might be better off line, but there's complication between [on realized] and unrealized. You're probably seeing a lot of unrealized there and you have to flow through to FFO statement to understand what's actually realized.

Suffice it to say very proudly say you're never going to hear effects as variance item in our FFO as we hedge all of our FFO earnings, as I think you know. There was an item in tax where we had some sale of investment tax credits in the quarter. We'll have fewer of those in the following quarter. But once again, that together with the ventures gains, we're all previously contemplated in our guidance.

Thank you, John. Operator, next question.

Steve Sakwa, Evercore ISI.

Yeah, thanks. Good morning. I guess on page 12, you guys break out your ending occupancy by unit size and I noticed sequentially there was a much bigger drop on the spaces that we're kind of below [250]. So I'm just wondering if you can sort of speak to the strength of the bigger boxes, maybe the softness in the weaker.

And then just on the Southern California, I notice that your lease percentage in SoCal went up about 120 basis points sequentially. So any comments just around Southern California demand either by product type or LA versus Inland Empire would be helpful. Thanks.

It's Chris Caton. Thank you for the question. I'll start with Southern California, and I think a couple of us will jump in on different trends by size category. So -- and I think I'll answer your short-term question, but it's worthwhile to step back and look at the broader trends in Southern California and take a medium-term view. We think Southern California has a really bright outlook. Couple of highlights of that stool.

The first is, well, Southern California is a major consumption center. It's a $2 trillion economy. It's got 23 million people, and the region is growing. Employment's up in the last year, and jobs are up 3% since 2019. Second leg of the stool, Southern California is growing as a gateway for international goods, container imports into the ports of LA and Long Beach are up 12% since 2019.

Now global manufacturing patterns are shifting, as I think you're aware, but they remain positive for Southern California. Asian imports in the United States are up 21% since 2019 on an inflation-adjusted basis. Now yes. I think you're aware China should be down and it is, but only 6% since 2019. And so this is a testament to the China Plus One strategy that we and others have been talking about. There's significant growth in all over Asia, it's up 40% since 2019.

Third leg of the stool on the outlook for Southern California: barriers to supply. They're high and rising. Southern California has had scared land availability, onerous municipal requirements. And now there are state restrictions. With the adoption of, say, Bill AB 98. These together, restrict future new development.

Now see if you're asking, I think it's important to recognize headwinds remain for Southern California as Tim alluded to in his script, customers are still working through some spare capacity, having taken more than they need it when vacancies were zero, but these long-term trends will be more important over time.

As it relates to the very short-term cyclical contours you're asking about, a couple of things have emerged in the last 90 days. One is demand remains soft in LA and there is a clear -- upgrade cycle emerging there, where Class A is outperforming Class B. Generally demanded and better in the Inland Empire, given the growth of the ports that I described earlier. And Orange County as a low market vacancy with -- and that positions us better to recover earlier.

Now you asked about the first size, the first question as it relates to size, I'm going to turn that over to Dan.

Yeah, just quickly on the sizes, certainly, which we've had some impacts on the smaller sized spaces in China that you see there. But when I look at this number quarter over quarter, the smaller size space is typically underperforming on occupancy basis to the other three buckets. As a matter of fact, quarter over quarter three of the four buckets were down slightly. So nothing really specific as it relates to historical trends.

Thank you, Steve. Operator, next question.

Michael Goldsmith, UBS.

Good morning. Thanks for taking my question. You talked a little bit about how the customer has remained engaged, but they're also there remains a lot of sources of uncertainty and presumably that's related to the macro and interest rates and the election. So I guess the question is within the context of maybe past cycles or other periods of uncertainty, how quickly given that demand gets pick up as that uncertainty has been released?

So said another way like when some of these factors stop weighing on the customer. Does that translate to an almost immediate translation to demand, or does it take a couple of quarters to ramp up from there? Thanks.

Hi, Michael. Yeah, I heard your question as how quickly can demand recover as uncertainty is ebbs. So couple thoughts on that first, I think we should have a measured outlook on demand. Customers are engaged but taking in taking their time in terms of making decisions. And we really are focused on spare capacity in the supply chain getting used up, as Tim described earlier, and we're seeing that happening. So utilization early this year, at the beginning of this year was below 84% and it's mid-80%s, 84% is now. So it is in the building, which will be a catalyst for our customers to take space.

And indeed, there are these tailwinds of economic growth, of trade growth, of consumption growth and the acceleration of e-commerce continues. So I think that we should just over the near term, have a measured level of optimism. We just need to watch the market advance.

Thank you, Michael. Operator, next question.

Craig Mailman, Citi.

Good afternoon. Maybe just circling back to capital deployment here on the development and acquisition front, I guess on the development side, very helpful where you think replacement cost rents are relative to new starts. But from a land basis perspective, could you give us a sense of kind of what's in that ready to go bucket that actually kind of works from a basis perspective given where rents are today? I guess that's one part of the question.

And then the other part just on acquisitions you guys are talking, seems like more bullish, you raised guidance here. Just curious kind of globally where you think the best uses of that or best targets are today? And how do you fund that given a on a stabilized basis, your equity is probably up around 6%, at least on my numbers? Are these more debt finance or these through the fund business? Can you just give us a sense of where and how you kind of want to put that capital out and whether you're interested in more bigger private portfolios or the historic bigger platform deals you guys have done the past?

Hey, Craig, it's Tim. Let me congratulate you on getting three questions in there at ones. Let me just start on this on the funding and the balance sheet and pass it back to Dan on the capital deployment pieces. I would still view us as having a lot of capacity in our own balance sheet, which has been an incredible, I'll say. We raised a lot of debt proceeds over the last few years. Well, our normal capital recycling has been a little bit slow. But if you look at our supplemental, look at our credit ratios over the last few years, including this morning, they're very healthy and consistent and even quite strong for our ratings.

So we've been able to tap into that. And the reason that's been occurring is that EBITDA growth as, what really guides that capacity, remains very strong alongside the earnings growth. Alongside I would also say that has mentioned in my remarks, strategic capital fundraising is improving, not just what we raised in the quarter, but I feel like the body language and call notes that were getting, suggests that we're able to continue to be strong.

So I think a resume option of more normalized levels of capital recycling via contributions is very close. And that has been, as you know, our principal source of funding and many of event.

Yeah, then Craig, on the deployment front, we own land in about 50 -- over 50 markets globally. There's event's average vintage year is about 4.5, 5 years old. And the mark on that book is about 120% of book. So we have plenty of opportunities that pencil today and then keep in mind a lot of that land, the other 60% or so is on its way through entitlement where we create a lot of mixed ourselves as well over time.

So we don't see a shortage of opportunities. And keep in mind, as we underwrite these deals, we put them in at market value. So we just have such a wide dispersion of where this land manage exist. And then we also have a land bank that consists of a covered land plays and options that you actually don't see in that land bank. So again, not a shortage of opportunities.

It's helped the point to any place globally where we want to allocate more than others. It's not the way we've ever operated, great-scale in virtually every market in which we operate. So really comes down to looking at every deal on the deal by deal basis and doing the highest quality deals.

Thank you, Craig. Operator, next question.

Caitlin Burrows, Goldman Sachs.

Hi good morning, everyone. The earnings release commentary, you mentioned how Prologis is a partner of choice to meet supply chain digital and energy infrastructure needs. So could you give an update on the digital and energy side? I know it's a pretty open-ended question, but with those business lines new or what has been the focus here to date for them, kind of whatever the next near-term steps?

And also can you clarify what portion of the starts -- development starts in the quarter might have been data centers? Thanks.

Okay. I'll just pick up the energy piece and maybe pass it to Dan for data centers. As I mentioned, we have a good run rate of new energy starts in the quarter. We're talking about the solar business, both generation and storage over 50 megawatts in the quarter, which puts us at a really good pace run rate that has been accelerating in our solar program, which two years ago was broadly focused, really just in the United States, has now expanded around the globe and is active in Europe, LatAm, and Asia. So we feel, as I mentioned, really good about the escalating pace for that activity and where it's ultimately going to get us over 2025 marching towards that 1 gigawatt in fall.

And then on the other data center front, overall 2024 has been, call it a bit of a -- exceeding the plan. We have focused on two things, building our pipeline and building the internal capabilities. Both are going extremely well. We have 1.6 gigawatts of secured power, of which 490 megawatts is currently under construction. We have an additional 1.4 gigawatts in advanced stages where we have high visibility to that procurement and then another over 1.5 gigawatts of applications submitted in dozens of different locations around the world. So very pleased with the pipeline with building and the team are establishing there.

You asked about the third quarter start that you see there, that is a powered shell building that we started a couple of years ago with a few different customers we're working with. That ended up turning into a turn-key deals. So what you see there is the conversion from a powered shell to a turn-key .

Thank you, Caitlin. Operator, next question.

Vince Tibone, Green Street.

Hi, good morning. Could you share net absorption and supply completion in the quarter for US portfolio? And also provide any update to your full year outlook for supply and demand? It sounds like nothing big change. It surprised too much during the quarter, but just wanted to confirm your outlook and get the recent actuals there.

Hey, Vince. It's Chris Caton, thank you for the question. And your read on the quarter is correct. So we saw 40 million square feet of net absorption in the quarter, 63 million square feet of completions. So let's just zoom out and talk about the year and talk about how the direction is heading because we are progressing through this bottoming phase. So net absorption this year will amount to 160 million square feet, and that's against deliveries that are 300 million square feet. So naturally, market vacancies are rising. They're rising to 6.8%.

And it sounds like you're very familiar with historical data. So you'll know that 6.8% is a low number in the totality of history. But there's something that's happening in the background that's really -- that doesn't always get attention we're talking about, which is the emptying of supply chains. So deliveries peaks a year ago at 135 million square feet per quarter and they fall into that number I gave you a 63 million here this quarter, so less than half in terms of the day decline. And they'll continue to decline into next year.

At work here in the backdrop also, it starts are very low. We have them at 40 million, 42 million square feet in the quarter. So when you put all this together, what you find is the under-construction pipeline, which is about 215 million square feet today, is at its lowest point since 2017. So we're going to be going in 2025 with a relatively low level of supply and an opportunity for demand to improve as we progress through this uncertainty in the spare capacity.

Thank you, Vince. Operator, next question.

Ronald Kamdem, Morgan Stanley.

Great. Hey, just two quick ones. I'd sort of following that last question in terms of asking it a different way. When are you thinking availability sort of piece of the portfolio? I remember it was 4Q '24. Has that sort of changed at all once that pushed out to?

And then the second part of the question, when we think about the same store cash NOI guidance for this year, are there any sort of one-timers, puts and takes or comps that we should be aware of as we start thinking about 2025? Thanks.

Hey, Ron, Chris Caton. So I think you said portfolio but I think you might have meant market. So I'm going to answer for the market in terms of vacancies. So we still have vacancies peaking in the later part of this year, but just taking a cautious stance on the direction of demand and that uncertainty, and that's their capacity that we I've described. We think you should anticipate a measured pace of -- basically an elongation of the peak over the course of the first part of next year. You'll see recovery emerge later next year and accelerate into 2026. I think that's something Dan described earlier.

Hey, Ron, it's Tim. And then just picking up the second part of your question. With regard to cash same store, the answer would be no. I can't think of anything that would be one-time in nature. As we report that metric, we exclude things like lease termination fees that might fall in that category. So that's not there any way. The only thing I can maybe think of as free rent is normalizing back to market norms. There could be a little more free rent next year than we [line up] have seen in the first half of this year. But that would be relatively small.

If I widen out a little bit, though and take a question further same-store out in the future, anyway, it's probably a good opportunity just level set people on. We've seen market rent declines thus far this year. We've been clear about them continuing a bit in next year. We've highlighted that occupancy is bottoming here and going to sit here for a handful of quarters.

So looking ahead to next year, it's probably best to think about just the things that we know. And the way I would assemble a same store view going into next year would be to look at, for starters, the rent change either on a cash or net effective basis that we've had thus far this year. We know that that's got a half-year effect going into 2025 and then also make some assumptions about what rent change might be in 2025 similarly following the half-year convention.

I think if you put that math together there today and think about a role level at 10% or 11%. On a net effective basis, you'd probably find yourselves or is it something like 5%, 5.5% to 6% for that component of same store. Now net effective basis, of course, we would have the impact of the [FDLA] from the Duke portfolio that takes something like 100 off of that. So you're squarely somewhere around 5%.

And then the last thing to think about is just occupancy trends. And again, things really murky to forecast occupancy from here. But you could at least take into account the fact that the occupancies have been declining over the course of this year. So would stand to reason on at least an average basis this year than next. That would probably be an additional headwind on same store.

Thank you, Ron. Operator, next question.

Blaine Heck, Wells Fargo.

Great. Thanks. Good morning out there. We've heard a lot recently about strong demand from Asian e-commerce and 3PL companies. So I was hoping you could talk about whether you signed any deals with the tenant and just your view on whether this is just the massive pull forward of demand ahead of potential tariff increases or whether you think those groups we continue to lease space into 2025 and beyond?

Hi, Blaine, it's Christ Caton. Thanks for that question. I'll give you a concise answer and then I'll provide you some context because this is a growing category . And so yes, we are leasing with these customers. And yes, we think they will continue to lease space into next year and beyond. And no, we don't really think it's much related to any sort of pull forward as you asked .

But let's just zoom out and understand kind of the broader context here. So to understand really obvious 3PL companies, it is productive to first start with the Chinese e-commerce platforms. They're enjoying rapid growth this year, last year. We're talking about 25%, 50% annual growth and more depending on the concept. Until the Chinese 3PLs obviously are performance logistics here and there are growing rapidly.

I'd say they represent roughly 20% of net absorption this year. And what it also offers our businesses are diversifying has now they compete for all contracts, not just Chinese e-commerce. And so many of these customers are position for growth. They're signing long-term leases, and they are investing in their space.

You ask after this pull forward, and so it is natural to think about how my tariffs and changes in tariffs effect these customers. And a couple of ways to think about it. First, the growth of this ecosystem, this is one that connects Asia manufacturers with American consumers. What they're doing is they're bypassing the traditional import distributors, and they're doing it in response to the past tariffs, that margin pressure brought about by those tariffs.

So in summary of that point, some of the growth this year is simply a shift in business model in response to pat tariffs. The second point which I described earlier is look, Asian imports are up 21% versus 2019 on an inflation-adjusted basis. And this is really fueled by that China Plus One manufacturing model and the growth of Asia ex-China imports from Asia ex-China, which are up 40% as I said.

Then the third in the details of tariffs is something called diminimus provisions. You may be aware is a provision that allows goods to come in and avoid tariffs under a certain value. These are likely to be wound down under a wide range of scenarios. But it's worth noting that these are only 3% -- good coming in under the diminimus provisional only 3% of Asian imports.

And so look as the category matures, this is a growth category for sure. There will be winners and losers. And please know that we employ the same rigorous, credit evaluation process here as we do with any and all of our prospective customers.

Thank you, Blaine. Operator, next question.

Nick Thillman, Baird.

Thanks, good morning out there. We noticed in the past few quarters has been an uptick in lease commencements with term less than a year in the core portfolio of roughly like 50% of commencements. I guess wanted to get some more color on those kind of specifically, are these tenants opting for shorter-term renewals. Do these new tenant, kind of looking for suite space, given the uncertain macro, anything you could provide there will be pretty helpful. Thank you.

Hey, Nick. It's Tim. I think that's an element of it. Some uncertainty around the part of the customer. I think more so it's recognition in certain cases we're being very strategic about the level of rents and some of our markets and what's being locked in now. And there's just bespoke certain situations where we see an opportunity to keep it on the shorter end where we see some of the rent recovery happening sooner than the overall forecast. And so there is a strategy in that part as well.

Thank you, Nick. Operator, next question.

Josh Dennerlein, Bank of America.

Yeah. Hey, guys, thanks for those of filling in for Jeff today. Just looking at the occupancy across regions, it's looks like Asia and LatAm kind of step back, any kind of trends to flag in those two regions or it's like what you're seeing in the US, it looks like it's more stabilizing at this point.

Thanks of the question, Josh. Really just comes down to the impact from China. Japan certainly has some oversupply issues we're dealing with as well, but our portfolio is in good shape there. But it's really China that we see impact.

Thank you, Josh. Operator, next question.

Mike Mueller, JP Morgan.

Hi. Are there any specific pockets of the portfolio or regions that are driving the higher development stabilization guidance?

Thanks for the question there Mike. Well, this development book is spread all around the globe. So there's no trend to point to.

Thank you, Mike. Operator, next question.

Nicholas Yulico, Scotiabank.

Thanks. I just wanted to clarify a couple of numbers. I think you said that the market rents globally were down 3% this quarter. And then last quarter, the forecast was for the next 12 months down 2% to 5%. So are those the same periods on measurement? I just want -- because it would seem then that forecast was already hit this quarter along based on the sequential decline unless I'm confusing something here. Thanks.

Hi, Nicolas. It's Chris. Thanks for the question. So the time periods are going to be different. You have the correct numbers. And as Dan described, we continue to see rents [desoft] in our view today is now a different rolling 12 months view. And we remain cautious on rents over that time period. And as Tim described in his script, run softness should persist in the middle part of next year.

Look I might just add that it's fair to interpret the way you're looking at those numbers, but yeah maybe at the -- depending how you count at the north or south into that range, maybe that would be closer to [five] over the preceding 12-month period that we described last quarter and than not given what we saw so far in the third quarter.

Thank you, Nick. Operator, next question.

Michael Carroll, RBC Capital Markets.

Hi, this is Rudy on for Mike. And I was just wondering what kind of the jump in CapEx this quarter.

I'm sorry. I didn't hear the end to that question. what drove what?

The jump in CapEx for this quarter.

A lot of that is focused in -- you can see the components of CapEx in the supplemental between property improvements and leasing commissions and tenant improvements. There are a lot of leasing in SoCal in particular it's just a sort of a reminder that rents there are very high the commission's lined up and turn being a quite high. And then as you -- it's quite clear from our supplemental as well, where we have property improvements disclosure that can be pretty lumpy between quarters and it was a bit elevated here in Q3, but on a trailing 12 month basis, very normal.

Thank you, Rudy. Operator, next question.

Todd Thomas, KeyBanc Capital Markets.

Hi, thanks. First, can you just talk about leasing demand and absorption trends throughout the quarter a little bit? How the quarter played out a bit July through September? And then also in terms of the space utilization and comments that you've made around capacity and the portfolio, which seems to be an important input into your forecast, your portfolio skews toward consumption. And I'm just curious if you have any thoughts around the utilization metrics from inventory levels or I guess inventory build ahead of the election and potential tariffs and also the East Coast port strikes and whether you might expect to see some volatility on utilization in the near term.

Hey, Todd. It's Chris Caton Thank you for the questions. Answer on the first one is demand was steady through the quarter, so no meaningful acceleration or decleration which I think what you're asking. As it relates to utilization, I guess -- well, maybe we step back and cover some of the numbers that I alluded to earlier. So there is an upward trend this year. The year started below 84%. I think I mention it in this up. I think [84%] and there's no noise from quarter to quarter, which is a combination of good coming in and coming out as well as just the methodology, which is survey-based.

I think if you step back and consider some of the context. One thing I'd add to your consideration is look, import active equity really shows there's an effort to restock supply chains. But this is occurring at amidst of -- perhaps more resilient consumer than was expected. And so those consumers are pulling goods out of supply chains and kind of keeping utilization a little bit below what we consider to be a normal level.

Thank you, Todd. Operator, next question.

Brendan Lynch, Barclays.

Great. Thanks for taking my question. I'm hoping you can help us reconcile the guidance from the December Investor Day. It sounds like rent growth is around 0% through 2026, and vacancy is going to peak at a little bit higher than what you had been expecting. So how should we think about your core FFO CAGR over the next three years?

Hey, Brian, it's Tim. I would probably just put that aside, I think there's been so much change right now in the markets that as I was doing earlier and describing the way to think about 2025, but just take a fresh look of where we are now with regard to at least mark to market. They've been rents over the next 12 months or whatever that period is before we start to see it accelerate again.

It's really important to appreciate how much that 34% lease mark to market will sustain earnings. If you kind of map out that as where rents will start a bit of a decline for the next 12 months and then an increase thereafter, you'll see on rent change alone, five, six, seven years of very strong mid-single digit, same store growth just out of the rent growth component by itself.

So that's the underpinning. Over the long term, you're going to think about the adverse to that as you march down to the bottom line between financial and operating leverage. Admittedly, there's some headwinds on the financials leverage piece in the near term as interest rates are going up. But over the long term, that will be productive to the bottom end again.

And for Prologis, then you're really going to think about all the other things that we do, which is really the growth and capital deployment. Our higher and better use activity in data center, strategic capital, ventures, the energy business. These are all adders to our growth that are complementary on their own, but I would say synergistic back to the core business as well. And that's how you should think about long-term growth for us.

Thank you, Brendon. Operator, next question.

Steve Sakwa, Evercore ISI.

Yeah, thanks. Just wanted to clarify just two things. I think, Chris, you said something about 25% of the demand this year was from these Asian 3PL companies, I guess was that your portfolio specifically, were you making a comment about the market or Southern California in particular? I just wanted to sort of clarify that.

Hey, thanks for the opportunity to clarify. That's broadly across the marketplace.

Okay, thank you. That was the last question here. I'd like to just wrap up by making a few points. First, the quarterly results met our expectations. Secondly, we think we're in a bottoming process that's underway with completions very clearly in a downtrend. Lastly, capital values are increasing, fundraising has improved, and we're actively investing in the future of our business. And we're in this has a long run.

With that, we look forward to speaking you at the upcoming conferences and again next quarter.

And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Have a great rest of the day.