Prologis Inc (PLD) 2020 Q4 法說會逐字稿

Welcome to the Prologis Q4 earnings conference call.

My name is Amy, and I will be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

I'd now like to turn the call over to Tracy Ward.

Tracy, please begin.

Thanks, Amy, and good morning, everyone.

Welcome to our fourth quarter 2020 earnings conference call.

The supplemental document is available on our website at prologis.com under Investor Relations.

I'd like to state that this conference call will contain forward-looking statements under federal securities laws.

These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions.

Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.

For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings.

Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures.

And in accordance with Reg G, we have provided a reconciliation to those measures.

This morning, we'll hear from Tom Olinger, our CFO, who will cover results and real-time market conditions as well as guidance.

Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Dan Letter, Ed Nekritz, Gene Reilly and Colleen McKeown are also here with us today.

With that, I'll turn the call over to Tom.

Tom, will you please begin?

Thank you, Tracy.

Good morning, everyone, and thank you for joining our call today.

I want to begin by acknowledging our team and their great work this past year.

In an incredibly challenging year, our accomplishments were significant and possible because of the work we've done over the last 10 years building the best-in-class portfolio that is critical to today's supply chain and centered on our customers.

During the year, we closed on $17 billion of M&A, further fortified our balance sheet with lower rates and line of maturities, generated over $1.1 billion of free cash flow after dividends, and importantly, continue to deliver sector-leading earnings growth.

Since the merger in 2011, our earnings CAGR of 9.5% without promotes has outperformed the other logistics REIT by more than 350 basis points annually.

This is the result of the unique business model which has consistently outperformed year after year.

Turning to our view of the operating environment.

Our proprietary data shows that the strong demand we experienced in the third quarter has continued.

Globally, leases assigned in the fourth quarter were a record 65 million square feet or more than 1 million square feet per business day.

This was driven by new leasing, which rose 22% year-over-year on a size-adjusted basis.

A broad range of customers signed new leases in the fourth quarter, led by consumer products, food and beverage, electronics and health care segments.

E-commerce activity accounted for 19.8% of new leasing.

The need for speed and flexibility is also reflected in elevated short term leasing, which was up 58% in the quarter as 3PL, retail and transportation customers raced to secure space ahead of the holidays.

Lease proposals remain at healthy levels.

In the U.S., fourth quarter net absorption was the highest on record at 100 million square feet and in excess of new supply of 90 million square feet.

Rents in our markets grew by 3.2%, with all the growth coming in the back half of 2020.

We anticipate rents to grow by approximately 5% in 2021.

Houston is the only U.S. market on our watch list.

As a reminder, we moved Atlanta and Central Pennsylvania from our list in the second quarter.

In 2021, we expect supply to decline year-on-year, balanced with demand at 280 million square feet each.

Conditions are also healthy in our other markets across the globe.

In Europe, rents began to rise in the fourth quarter, and we expect 2.5% of additional growth in 2021, led by Northern Europe and the U.K. The implications of Brexit have been largely positive for us as we anticipated 4 years ago when Brexit was first announced, inventory disaggregation will eventually lead to higher inventory levels in both the U.K. and the continent.

We're watching new supply in Poland and Spain.

But for context, these 2 markets account for just 1.7% of our share of NOI.

In Tokyo and Osaka, historic high levels of supply are being met with a very strong demand.

Over 2/3 of the development pipeline is already pre-leased, and we expect market vacancies to remain below 2%.

For China, supply is moderating, even as the market remains soft.

In our portfolio, we leased a record 10 million square feet in the second half of the year, a credit to the great work of our new China leadership team.

Turning to valuations.

Our logistics portfolio posted the largest sequential increase in a decade, rising 5% in the U.S. and globally, and are now nearly 6% above prepandemic levels.

Applying this increase to our $142 billion owned and managed portfolio, we estimate the value of our real estate rose by $7 billion in the fourth quarter.

We expect continued fundamental improvement in 2021 and beyond based on 3 drivers.

First, a powerful economic recovery, including the highest GDP growth in the U.S. in more than 2 decades, the combination of corporate and personal savings as well as significant governmental stimulus is a loaded spring, which will translate to significant economic growth in the back half as the vaccines continue to roll out.

Second, the pandemic accelerated the retail revolution.

The e-commerce penetration rate jumped 480 basis points to 20% of goods sold in the U.S. in 2020.

Based on early reports, e-commerce holiday sales grew by at least 30%.

While we expect the share of goods purchased online to grow further, a pause later this year would not surprise us as consumers expand spending on services and experiences over goods.

Our customers continue to plan for the long term, retooling supply chains for increased e-fulfillment should generate cumulative incremental demand of 200 million square feet or more over the next several years.

Third, we expect higher inventory levels.

Inventory-to-sales ratios remain near all-time lows.

We believe this had an impact on our customer space utilization as it ticked down to 83% in the fourth quarter.

We see early signs of inventory restocking as containerized import volumes in the U.S. rose 24% in November and are on pace to set a quarterly record.

Longer term, the need for more resilient supply chains will lead to higher inventory levels.

We estimate that a 5% increase in inventory levels would produce incremental demand of nearly 300 million square feet in the U.S. alone.

These changes will take years to play out, driving strong long-term demand.

Turning to results.

The work we've done to create the best-in-class portfolio of scale and lowest cost structure in the industry is delivering exceptional financial results.

2020 core FFO, excluding promotes, grew by 14% and came in at the high end of our range at $3.58 per share.

We also recognized record net promote income of $0.22 per share.

Net effective rent change on a rollover in the fourth quarter was 28%, led by the U.S. at 32.1%, both high water marks for the year.

Our in-place to market rent spread now stands at 12.8%, up about 60 basis points sequentially.

Collections continue to outpace 2019 levels.

And as of this morning, we collected over 99% of fourth quarter rents and over 95% of January.

Bad debt was 42 basis points for the quarter and 43 basis points for the year, both below our expectation.

Our share of cash same-store NOI growth was 3% and led by the U.S. at 3.5%.

We made meaningful progress on the sale of nonstrategic assets acquired from Liberty.

We settled disputes related to the construction of the Philadelphia Four Seasons Hotel and the Comcast Technology Center.

We completed the disposition of our 20% ownership interest in the hotel and the previously announced portfolio in the U.K.

To date, we have sold more than $600 million of former Liberty assets, exceeding our underwritten value by more than 18%.

We now have less than $400 million of former Liberty non-logistics assets remaining, consisting primarily of our interest in the Comcast headquarters.

For strategic capital, our team raised $3.1 billion in 2020, with 40% from new investors we have yet to meet in person.

Market and property tours as well as due diligence activities were all conducted virtually as our team capitalized on our early investments in digital infrastructure.

Our balance sheet remains the best in the industry with liquidity and combined leverage capacity between Prologis and our open-ended vehicle of more than $13 billion.

Our capital markets activity in the quarter brought our total average interest rate down to 2%.

We will look for additional opportunities to refinance at attractive rates.

In fact, at current interest rates in our mix of currencies, we could issue 10-year debt at a blended all-in rate of 1%.

Turning to our guidance for 2021, here are the key components on an R share basis.

We expect cash same-store NOI growth to range between 3.5% to 4.5%.

We're estimating bad debt expense to range between 20 to 40 basis points of gross revenues, and average occupancy for our operating portfolio to range between 95.5% and 96.5%.

We expect a seasonal occupancy drop in the first quarter then trend higher as the year progresses.

For strategic capital, we expect revenue, excluding promotes, to range between $435 million and $450 million.

Promote revenue will be negligible in 2021.

In fact, we'll have net promote expenses of $0.02 per share for the year, which relates to the amortization of costs from prior period promotes.

Our historic net promote income then averaged approximately 20 basis points of third-party AUM, which would be $0.06 to $0.07 of earnings per share based on current promotable AUM.

Looking ahead, recent property appreciation leads us to expect net promote income per share in 2022 to be at or above this historic average.

We expect to start between $2.3 billion and $2.7 billion in new development, with 45% build-to-suits and for stabilizations to range between $1.9 billion and $2.1 billion.

Dispositions will range between $1 billion and $1.4 billion, with the majority expected to close in the first half of 2021.

We're forecasting net deployment uses of $350 million at the midpoint.

And as a result, our leverage will remain effectively flat in 2021.

Putting this all together, we expect core FFO, including the $0.02 of net promote expense to range between $3.88 to $3.98 per share.

Core FFO, excluding promotes, will range between $3.90 and $4 per share, with the year-over-year growth at the midpoint of more than 10%, delivering another year of exceptional growth.

We enter 2021 with optimism and confidence.

Our ability to deliver value for our customers beyond real estate, using our unmatched purchasing power and significant investments in technology, innovation and data are significant competitive advantages that will drive further outperformance.

With that, I'll turn it back to the operator for your questions.

(Operator Instructions) Your first question today comes from the line of Caitlin Burrows with Goldman Sachs.

Your guidance for 2021 development starts is almost 20% higher than starts with last year.

So could you just go through what's the balance of build-to-suit and speculative developments?

And how much kind of visibility do you have on that?

Could it be increased further in the year?

Yes.

Caitlin, this is Gene.

I'll take that question.

And you were breaking up a little bit, but I think you're talking about the development activity in the coming year.

So this year, about 85% of what we're guiding to are named transactions.

So we have very few placeholders.

And as Tom mentioned, we're 45% build-to-suit in the forecast, and it is really difficult to forecast how that's going to play out.

But if there is a bias, is probably is to the upside.

But at this point, we're comfortable with the forecast.

Got it.

Okay.

And hopefully, better, but sorry, if I'm still breaking up.

And then if I could ask a second, just, Tom, you mentioned that short-term leasing was up.

So I was just wondering how those short-term leases compared to regular leases in terms of length and rents and the thought process on completing those versus longer-term leases?

Thanks, Caitlin.

You broke up a little bit there, but I think just how the -- our thought process around short term leasing.

I think we're going to continue to see short term leasing probably stay at elevated levels, just given the tightness of the market and the need for customers to act and move quickly, as we get into 2021.

I hope that addressed your question.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

So maybe just the first one going to the core guidance, same-store NOI guidance.

If we sort of look at your components with the occupancy on average, slight uptick escalators, which I'm assuming 2.5%, 3%, your bumps that you're going to get from expirations, rent expiring.

It seems to me that if I put all that together, you should be kind of well -- if not well above, but above 4%.

So I'm just wondering if you can walk us through maybe what the puts are there and what would get you to the bottom end of that range?

Yes.

The simplest way to look at it for same-store in 2021 is it's all driven primarily by rent change on roll.

So think about 25% roll and -- I'm sorry, 15% roll -- lease roll.

And from a GAAP perspective, think about 25-percent-ish rent change on roll.

And as you mentioned, occupancy and bad debt are pretty consistent, don't move much year-over-year.

So that drives the GAAP same store.

From a cash perspective, think about that same 15% roll, call it 12-ish percent rent change on roll.

You're going to see bumps of around 3.25% on the portfolio in place.

And then you'll see a little bit of normal free rent out of that.

But those components should get you right near the midpoints of our guidance.

Your next question comes from the line of Jamie Feldman with Bank of America.

I was hoping to take a step back a little bit and just get your perspectives on the election and what you think it might mean in terms of policy or tenant reaction or customer reaction to just kind of new leadership?

In terms of what you think might change for warehouse demand, whether certain markets look more interesting?

Or any themes or trends you think we should be watching?

And I guess, thinking about the, Biden's Buy America plan.

Wondering what your thoughts are on that as well?

Sure, Jamie, I'll take a stab at that.

I think the most significant near-term thing is going to be the infrastructure spending, and that will have a positive effect on demand for our product.

With respect to Buy U.S. First and all, we had that in the previous administration.

But if you actually look at the numbers, they don't support the newspaper headlines.

So we don't think there's going to be a material change in that.

Because it hadn't -- we haven't had any of that in the last 4 years either, and that was pretty much the same promoted policy.

But the big drivers of our business is not necessarily economic policy.

It's just the mix of consumption between bricks-and-mortar and e-commerce.

And the underlying growth rate of the economy, which should be very strong, bouncing from a down year basically and recovering all of that in 2021.

So we think those are the 2 big drivers and economic policy will -- affected a little bit around the edges, but not the main driver.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

I guess I wanted to take Tom's comment about the 65 million square feet of leasing in the quarter, which is exceptionally strong.

And maybe just look at Page 4 of the supplemental where you have that chart that shows new lease proposals and then the space utilization.

And I'm just trying to kind of square the proposals with kind of the strong leasing.

And then, just curious why the utilization figure is trending downward and maybe not upward.

Actually, I'm going to take that.

It's pretty simple.

People are running out of inventory because they haven't prepositioned enough inventory in the system to support the level of activity.

And remember, we need more inventory in the online channel than we do in the off-line channel.

And one of the big issues with inventories is that we can't get the containers back to China.

And so actually, we could support a much higher utilization and lower levels of stock outs, but that's what's going on.

Your next question comes from the line of Piljung Kim with BMO Capital Markets.

In the fourth quarter, your development starts ramped up, but with a lower expected development margin of 23% despite lower build-to-suit activity this quarter.

Can you just comment on this dynamic?

And if this is a good run rate going forward on margins?

Yes.

This is Gene, I'll take that.

So you are going to see and have seen for the past several years that our forecasted margins are quite a bit lower than our achieved margins historically, because these are underwritten margins.

Now we have been beating these margins for a variety of reasons.

Rent grade, rent growth, cap rate compression.

But -- so I would expect, and I think we've been saying this for a long time, that you'll see, over time, margins will normalize.

But that really depends on what the future cap rate environment looks like.

Your next question comes from the line of Nick Yulico with Scotiabank.

I was hoping you could just talk a little bit about expectations for rent growth in the different regions and this year.

And maybe you can break that up, if you see a difference between gateway distribution markets versus multi-market distribution, city distribution and Last Touch.

Hey Nick, it's Chris here.

Yes, we expect U.S. rent growth to be 5% in 2020 and a little bit better than 4% globally.

In terms of the different product types, look, we highlighted a couple of geographies that we expect to outperform.

For example, the U.K. and Northern Europe.

And in the United States, we've had a combination of the major Last Touch city distribution markets as well as some gateway distribution markets outperforming.

I'm thinking in New York, New Jersey, maybe in Toronto and Southern California.

They outperformed in 2020, we expect them to outperform in 2021.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

I would like to hear more about the evolving demand and leasing dynamics in the European portfolio.

And really specifically, when it comes to occupancy, which, until last year was a bit of a headwind.

It was slipping every quarter starting back in 4Q '18, now admittedly from a high point.

But how do things feel on the ground in Europe?

Have (inaudible), in fact stabilized?

And can we expect growth from here?

I mean, I believe this is the first positive year-over-year comp in 6 quarters.

Yes.

That may be the case in terms of the math of it.

Europe is generally a more balanced market than the U.S. demand and supply seem to move in sync together.

And generally, vacancy rates are lower.

The 2 exceptions are probably, I would say, the big exception is Poland.

And from time to time, you get Spain sort of moving up to that volatile end of the market.

But the rest of Europe is very well occupied.

So it's really the volume of rollovers in Poland and Spain that drive that balance in occupancy on the margin.

But throughout, our occupancies in Europe have been higher than the rest of our portfolio, in the U.S. anyway.

Your next question comes from the line of Emmanuel Korchman with Citi.

Hamid, may be this is one for you.

Do you think that the exit or EQT deal announced this morning provides any read-through to your private capital business?

Well, I think our private capital business continues to be undervalued by the Street.

All you got to do is look at the cops of -- comps of publicly traded investment management firms.

And once you consider the fact that well over 90% of our assets are in infinite life vehicles, and they generate significant promotes from time to time.

And that our margins keep on increasing, I think that multiple should be in the low 20s.

But I think most of the NAV models that I see are in the low teens or maybe even 10.

So I think the Street continues to undervalue that business.

Would it be worth more if we crystallized that value in a -- very specific transaction?

Sure.

But is it worth the headache on a company that has $140 billion of assets, to move around the value by $0.50 or $1 a share, probably not.

So we think there's upside to our NAV from our investment management business.

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

Can you provide some color on the tenant demand you're seeing?

I mean, I know in the beginning of the year, the middle of the year, a lot of the demand or Amazon specifically has been extremely active.

And have you seen or do you expect to see that tenant interest to broaden out more meaningfully as we move into 2021?

Yes.

Let me start it, and then Mike can give you more color.

But we think demand is pretty broad.

I mean, sure, e-commerce gets a lot of the headlines.

Because on the margin, that is the source of new demand, but there's plenty of demand from other sectors that continues and forms a strong base.

And within the e-commerce sector, of course, Amazon is the biggest player, so they get a lot of play.

But remember, Amazon is more in -- change of our total ABR.

And there are lots of other tenants that are doing well.

In fact, I would say everybody is pretty much doing well with the exception of the uses that support hospitality, like convention, exhibition, people and things of that nature.

The rest of the market is pretty strong.

Mike, you want to provide more color on that?

Yes.

Let's look at it in traditional leasing and then build-to-suits.

On the leasing front, their fourth quarter performance sort of normalized compared to typical Amazon numbers with us after robust Amazon activity in quarters 2 and 3. But the message there is, there's plenty of other companies, broad-based, that are driving traditional e-comm leasing.

And I think that speaks to the velocity going forward.

And then on the build-to-suit side, yes, Amazon was very active.

We did 6 build-to-suits with them in the quarter and, call it, 10 for the year out of 28.

However, there was a ton of restructuring well underway with the home improvement folks, food and beverage, health care, well underway with restructuring pre COVID, perhaps they took a couple of months pause during COVID, but man, they're coming back with a vengeance and marching forward with those restructurings.

And so while we'll see plenty of Amazon, I'm really encouraged, the other uses.

We just signed a big lease with Kraft about a month ago and working with a ton of brand names, next year we'll be happy to talk more about.

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

Maybe a follow-up to an earlier question.

But I think last year, we were talking about the cadence, potentially development stabilizations, given kind of the buildup of starts and resurgence there.

And I'm just kind of curious, it looks year-over-year like that pace of stabilizations is expected to slow.

Is there something going on there that changed that outlook?

Well, the only thing I can think of is that we deferred some starts immediately when COVID hit, because we didn't know what kind of environment we were in.

But we've essentially restarted most, if not all of those things, and we'll be restarting them.

So I think we just got that pushed out, but the volume that's behind it is very significant.

So I would say the total level of stabilizations will be increased in the next couple of years beyond what it would have been and what our expectations would have been, certainly at the beginning of COVID.

But I would say even more than our expectations at the beginning of the year -- beginning of last year prior to COVID.

Your next question comes from the line of Tom Catherwood with BTIG.

I want to go back to something Chris had mentioned about above-average rent growth for Last Touch assets, which makes a lot of sense.

Obviously, we understand the supply-constrained nature of industrial markets in major cities.

But it seems like nowadays, every real estate developer is an industrial developer.

And especially in New York City, we're seeing a big jump in infill industrial projects.

Could this jump in development activity create supply demand imbalance and potentially put the brakes on rent growth for some of your Last Touch assets?

It could.

But I think what's going on in New York and elsewhere is that there's a lot of price discovery.

Nobody really knows what the ability to pay is for some of these customers.

And in all of these locations, we've underestimated the rental value.

So at least for the time being, all the price discovery has been good.

And the other thing you should take into account is that in these infill locations, you can have a lot of developers, but you're not going to have a lot more land or buildings that can be rehabilitated.

So I think you'll see it in terms of pressure on pricing of those assets more than you would see it on absolute supply, because the supply is pretty inelastic, and it will show up in price.

Your next question comes from the line of Blaine Heck with Wells Fargo.

I was hoping to get a little bit more color on the investment sales market and your interest in acquisitions.

There have been several large portfolios in the U.S. specifically that have traded in the second half of last year or early on this year, and I know you guys typically are looking at anything sizable that hits the market.

So without getting into specifics, unless you want to, can you just talk about what's kept you on the sidelines in these situations?

Is it pricing and underwriting being stretched?

Is it more of the geographic footprint that just doesn't overlap enough?

Or maybe it's just your focus on, more on development at this point?

Any color there would be helpful.

So all of the above.

Let me give you a quick answer, and Gene will fill in the blanks.

We are not good buyers of core, core real estate, auction by a brokerage house, where there are 55 people showing up at the margin.

A lot of these people have to build up their industrial capability and everybody's trying to get into that business because the other property types don't offer very many opportunities.

So those kinds are just duking it out on price is not our business.

So that means that building out our land bank, doing value-added acquisitions where we can bring our leasing and operational expertise to the table, deals that are hairy, et cetera, et cetera.

But general framework for looking at deals is returns.

How we can differentiate and have a competitive advantage.

And also in the case of portfolio deals, what the fit is, if we have to buy 100 buildings and sell 90 of them, that's probably not a very attractive transaction for us.

So the other thing I would just mention is that you posed the question in the sense that we're only going after big deals.

We do a lot of $5 million deals, too.

They just don't show up.

So we're there looking at pretty much everything that moves out there.

And we're there with offers on most, if not all of the ones that meet our quality standards.

But thankfully, in a lot of those core situations, we lose.

So we're good with that.

We're on the selling side of a lot of those transactions as well.

Yes.

And just to add a couple of things.

I mean, last year, we had 300 matters go through investment committee.

So as Hamid said, we look at a range of deal sizes and we look at every single deal.

Every single deal, we'll underwrite it and we'll look at it.

We're a bit picky on quality, that's an explanation.

And we execute when it makes sense for us.

But I wouldn't read into this that we're uninterested.

Your next question comes from the line of Dave Rodgers with Baird.

Tom, I wanted to follow-up on something you said earlier, a larger percentage of short-term leases, I think, in the fourth quarter, but we did see lease economics arose just a little bit was marginal, but we could see it happen.

I'm wondering if the economics were just a delay from COVID era, or if you're doing the shorter term deals aren't having the right amount of lease economics or the same lease economics, I should say.

And just to tie in another question, I'm not sure if it's related or not.

You guys lost the most of pocketing the 250,000 to 500,000 square foot boxes, really offset it with gains in the 100 to 250 size range.

Is this having an impact on the economics?

I guess I'm trying to figure out where the economics are going?

And what's driving these kind of economic occupancy trends?

Yes, Dave, I'll take both of those.

On the first one, remember, leases less than 1 year are excluded from our leasing metrics, that's consistent with what we do across our -- the agreement we have with our -- the other logistics around metrics.

So it's -- what's happening is, if you're looking at turnover costs, it's the higher mix of new leasing versus renewals.

We saw that in Q3, we saw it in Q4, and that is what is driving turnover costs slightly higher this quarter and same story last quarter.

And then, regarding economics, I wouldn't look at -- yes, we did see space sizes under 100,000 square feet, and it actually went up 100 basis points.

But I wouldn't look at the other segments.

They're quite strong.

I think that's just some activity that happened at quarter end and its noise, and all segments are doing quite well.

Your next question comes from the line of Eric Frankel with Green Street.

This might be related to Blaine's earlier question just about capital allocation.

But you mentioned that you sold most of the nonindustrial assets from the Liberty portfolio, but it looks like your held for sale portfolio is still somewhat elevated.

So maybe you could talk about the pace of those sales going forward?

And then secondly is regarding the operating portfolio.

It looks like Bay Area occupancy went down about 300 basis points or so quarter-over-quarter.

So maybe just comment on how the local economic environment there is affecting industrial demand?

Yes.

On the pace of sales, we match it with our need for capital, where -- depending on how you measure it, 19%, 20% levered.

So we don't want to dilute ourselves, and those assets are doing nothing other than appreciating.

So we'll be -- we'll take our time with respect to selling the industrial assets and we'll match them with our capital needs, self-funding model.

With respect to the Bay Area, my general comment and Gene may want to say more about this is that, the Bay Area is soft.

There is no question that the Bay Area, after almost a decade of straight run-up -- has gotten hit pretty hard in this downturn.

So I would say it's softer than L.A. in a Big Way.

But the good news is that there's been so much rental appreciation that even as these leases expire, you still, in many cases, rolling them up to market, but the market is just not as high as it would have been, say, a year ago.

Yes.

Eric, the only thing I'd add on San Francisco, agree with everything Hamid said.

And one thing to keep in mind, vacancy is 6%, 6.5% in the San Francisco Bay Area.

So it isn't as if you have a -- weak conditions on top of a very high vacancy rate.

So we're watching it.

And obviously, the performance is very much disconnected with L.A., but fundamentally, vacancies are not bad right now.

One other thing I would say about the Bay Area, Tom, I think the number is 10 million, maybe 12 million square feet has been taken out of supply in the last 5 years or so, and that trend continues because with competing land uses just gobble up industrial.

So actually, it's one of those markets where supply in the core Bay Area submarkets is actually going down.

It's being converted to -- life science is being converted to apartments, all kinds of other things.

Your next question comes from the line of Brent Dilts with UBS.

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

We got a new team in place in China that has been very aggressive in leasing space.

And the vast majority of our spec vacancy in China was -- our vacancy in the company on the spec basis was in China, and we're addressing that, and the new team is doing a fabulous job.

Your next question comes from the line of Jonathan Petersen with Jefferies.

Hamid, I was hoping to maybe pick up on what you were just talking about with the Bay Area, maybe just think more broadly.

I'm just looking at your top 4 markets in the U.S., Southern California, New York, New Jersey, Bay Area and Chicago.

Obviously, places that through the pandemic have seen decent outflows of people into the southeast.

So I realize that supply is constrained in those markets.

So I'm just thinking in terms of incremental investment going forward.

I mean, do we expect more investment in places like Dallas and Atlanta and Florida, places that are benefiting demographically?

Or do you think, you kind of expect things to go back to how they were?

Look, I think all of the markets that you mentioned were running so far above trend for a decade, and that had created so many imbalances that I actually think it's pretty good to take a breather for some of those markets.

No, I don't really think California's falling into the ocean.

There are a lot of people in the middle of the country cheering for that, but it's not going to happen.

I mean, just look at the last quarter, you've had -- look at the market cap that's been created in this area.

It's probably more than it's been created in a decade in some of those markets.

So no, I don't think -- so the numbers are actually pretty interesting.

If you look at the overall California numbers, I don't have them specifically for the Bay Area.

But this year and the way they measure it, it's a June 30 year-end.

But in the year ended June 30, you had 260,000 people move out of California.

That compares to the year before, like a more normal year, about 230,000 people.

So there is always this churning that happens.

But all of that is about 0.5% of the total population in California, and you still have internal growth.

So California's still growing.

It's just not growing at the same pace as it was before.

And I think some of the outflows have to do with temporary work from home kind of situations.

We don't expect all of those things to last forever.

So you'll have some people coming back to California.

I think housing prices have moderated, certainly on the rental side.

So yes, I think California is softer than it's been, but it's been on such a tear that it would have had to come to some kind of a moderation, and it has.

Your next question comes from the line of Ki Bin Kim with Truist.

You've already touched on this, but maybe I can follow-up on it.

Have your underwriting parameters have changed at all, looking into 2021?

And on the margin, where do you think you're different versus the average industrial builder or buyer?

I think our underwriting has moved down with -- the required returns have moved down in the same direction as the weighted average cost of capital has moved down.

I mean, capital market returns are lower.

So real estate returns are lower as well.

What we really look at is relative value and in a lot of these situations, the weight of the money coming into the industrial sector has created the situation where good assets and bad assets or not so great assets, the yield is compressing between the two.

And people just want to tick that industrial box.

So a lot of those people also tend to be leveraged buyers in which they can take better advantage of those lower rates.

So -- but the way we underwrite the assets in terms of quality and the ability of those assets to compete in the marketplace, that has never changed, that's the primary filter.

But obviously because of higher rents and lower cap rates, pricing has changed.

Your next question comes from the line of Mike Mueller with JPMorgan.

Looking at USLV and PELF, you have ownership stakes of about 50% there.

Do you see that gravitating down anytime soon?

USLV is our venture with Norges.

Actually, they're both our ventures with Norges.

And our deal with them was that we would have -- be 50-50 partners.

And we have certain rights to sell down to 20% in one of those ventures.

And -- but no, we like it.

It's been a good investment, and we continue to hold it.

And we've got plenty of capital coming from other places, mostly disposition.

So we haven't tapped that source for capital.

It's there if we need it, but I don't think we're going to need it for quite some time.

We can self-fund out of the nonstrategic dispositions and also our contributions.

Your next question comes from the line of Nick Yulico with Scotiabank.

This is Sumit here in for Nick.

So you've been recently doing a lot more analysis on labor-shared debt as well as availability in some of our markets, for example, in Atlanta.

And some markets seem to sell themselves like inland and buyer, no one puts out a flyer more than a page long.

So I'm interested in understanding whether the labor shed or labor availability issue, is it back?

Or is it in certain markets?

And if you could shed some light on what markets is it a problem in, if it is?

I think labor shortage of labor is -- you weren't coming through perfectly clearly.

But I think your question was, is labor continuing to be a constraint.

The answer is yes, pretty much everywhere.

And so I was really surprised, frankly, when I heard from our large customers, I think, back in April and May, in the early stages of COVID, relatively early stages of COVID, that labor continues to be their #1, #2 and #3 problem.

I thought it would have moderated, given the downturn and the unemployment rate.

And the key is that calculus is quality of labor.

So we've taken a lot of steps, as you know, with our community workforce initiative to try to address that to our customers.

But no matter how hard we work or how large that initiative gets, it's not going to even begin to make a dent in the problem that we have.

Are there geographical differences from place to place, for sure.

But those geographical differences have already been adjusted, because people don't put their warehouses in places where there is no labor whatsoever.

They put it in places where there is labor, but there's just not as much labor as they would like.

So they're all competing with one another.

And the turnover rate and that kind of labor, it's very high, it's about 40% a year.

So people move for relatively small changes in compensation and environment and customers are paying more attention to environment and all those amenities that can really be more attractive to labor in addition to paying more.

Your next question comes from the line of Jamie Feldman with Bank of America.

We've seen some news on Prologis buying some urban land lately.

I'm just curious, how should we think about multi story as a composition of your '21 development starts?

And similarly, with the rotation from bricks-and-mortar to e-commerce, any additional thoughts from the research you put out on retail conversions and maybe that becoming a larger part of your '21 development starts?

Well, Jamie, I don't know what papers you're referring to.

But we've been buying urban land in terms of covered land plays for at least 7 or 8 years in a pretty steady basis.

So we've been at this business for a long time and we're broadening it in certain markets.

But no, we've been after it for quite some time, and it's not just in the U.S., also in Europe, we're buying those covered land plays.

And those can be either leased as staging areas, you can get very good returns on those while you wait for the market or rents or entitlements to convert them to industrial.

And we don't have a multistory strategy specifically.

We have an infill strategy and that infill strategy drives you to multistory in certain locations with certain land economics.

But there's nothing in our business plan that says thou shall build 3 multistory buildings this year.

I mean, we're very opportunistic in that sense.

Your next question comes from the line of Emmanuel Korchman with Citi.

Tom, earlier, I think you discussed 200 million square feet of incremental demand over the next few years.

How much of that do you think can get taken care of by just innovation within the existing boxes, rejiggering, automation, more racking, et cetera, versus true incremental demand is going to lead to leasing from your end or others?

Actually, Chris is probably in a better position to answer that.

We've done a lot of work around automation and modernizing space.

So Chris, why don't you talk to that?

Yes.

Sure.

So the stats that Manny is referring to, e-commerce, specifically, we expect it will generate 150 million square feet, perhaps more in the U.S., 200 million square feet likely more globally.

Manny, no, I don't think it's about efficiency and the introduction of technologies.

I think this is about needing to strengthen supply chains over time.

As it relates specific to automation, the research we've done is to take a look at the productivity of assets, both through the brick-and-mortar supply chain as well as the e-commerce supply chain, we don't see a lot of change there.

Instead, when we look at that incremental 200 million square feet going forward, I think you're going to see that focus on Last Touch locations and city distribution locations, particularly in the world's global markets, those 24-hour cities.

And as Mike was referring to earlier, I think there's going to be a lot of diversity in that customer mix.

A lot of customers are starting to reassess how they want to go-to-market with e-commerce in 2021 and beyond.

And I think you're going to see a lot of diversity there.

So it's much more about bringing in new real estate requirements rather than introducing technology.

Yes.

And if I can jump at the end of that, I didn't answer a part of Jamie's question about retail conversions.

Look, you have our latest thinking in that in Chris's paper.

So I don't have a whole lot to add to that.

I think you will see more headlines about that than actual space converted.

But you will see some space converted so -- for a variety of reasons that you can read about in the paper.

Your next question comes from the line of John Kim with BMO Capital Markets.

On the Liberty portfolio, originally, you considered $3.5 billion of dispositions.

Now it looks like you're looking to sell about $1 billion, partially because you don't really need the proceeds.

But can you just refresh with us how much of Liberty's original portfolio you consider noncore for the company going forward?

Yes.

That deal hasn't changed.

It's about $3.5 billion still.

Of that $3.5 billion, if I remember correctly, about $700 million of it is not logistics.

And -- well, put it this way, it's office and suburban office.

We've sold some of that.

The only thing that really remains on that front is the downtown Philly assets leased to Comcast.

So the rest of the assets that are available for sale are just straight up industrial.

And these assets would be considered in the top, I don't know, 25% of most portfolios out there.

It's just that they don't quite meet our standards, but they're perfectly fine assets and they're appreciating.

And as you heard, I think Tom mentioned that even on the nonindustrial ones, we picked up 18% more value than we underwrote.

So on industrial, I think we're even going to do better than that.

It's just no sense of -- we could settle that at a really high price right now, but if the capital is sitting around not doing anything, we'll give a bunch of it back in terms of dilution.

So we're going to be patient with that.

John, that was the last question.

So again, everyone, thank you for being on our call, and we look forward to talking to you during the course of the coming quarter.

Take care.

And this concludes today's conference call.

Thank you for your participation.

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