Prologis Inc (PLD) 2017 Q1 法說會逐字稿

Good morning.

My name is Kim, and I will be your conference operator today.

At this time, I would like to welcome everyone to the first quarter earnings conference call.

(Operator Instructions) Tracy Ward, you may begin your conference.

Thanks, Kim, and good morning, everyone.

Welcome to our first quarter 2017 conference call.

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

This morning, we'll hear from Tom Olinger, our CFO, who will cover results and guidance; and Hamid Moghadam, our Chairman and CEO, who will comment on the company's strategy and outlook.

Also joining us for today's call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly and Diana Scott.

Before we begin our prepared remarks, 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 first 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.

With that, I'll turn the call over to Tom, and we'll get started.

Thanks, Tracy.

Good morning, and thanks for joining our first quarter earnings call.

I'll cover the highlights for the quarter, provide updated 2017 guidance, and then I'll turn the call over to Hamid.

We had a strong start to the year with core FFO of $0.63 per share, which exceeded our expectations by a little over $0.02.

The outperformance came from all areas of our business, with $0.01 from operations, a little less than $0.01 from deployment and the remainder from strategic capital.

Asset quality and location have never been more important as supply chains extend closer to major population centers.

Our portfolio is well positioned to take advantage of this secular shift towards the end consumer.

We leased over 39 million square feet during the quarter, down from last year as we're effectively running out of space to lease.

Global occupancy at the end of the quarter was 96.6%, an increase of 50 basis points year-over-year.

Notably, occupancy in Europe increased 180 basis points over the same period to 96.7%.

Our share net effective rent change on rollover was very healthy at 19.6%.

The U.S. was 29.2%, an all-time high and the fifth straight quarter above 20%.

Our shared net effective same-store NOI growth was 5.8% for the quarter, driven by higher re-leasing spreads and a pickup in average occupancy.

The U.S. led the way with same-store NOI growth of 7.1%.

Our same-store pool does include development completions that are available for lease.

Excluding these development assets, our same-store would have been 5.1% on a global basis for the quarter.

Moving to capital deployment.

We had an active first quarter.

Margins on stabilizations and starts remain very good, and build-to-suits were 77% of our first quarter starts.

Dispositions and contributions are on track.

Buyer activity remains strong, and market cap rates compressing slightly.

As a result, we are accelerating disposition timing.

We completed several transactions in our co-investment ventures during the first quarter, further streamlining our business.

We sold our investment in European logistics venture, generating 84 million in proceeds.

Simultaneously, we combined the $600 million venture into our targeted European logistics fund, resulting in a vehicle with $3.2 billion in assets.

In the U.K., we formed a new $1.3 billion development to [ whole ] venture, generating $213 million in proceeds.

In the U.S., we acquired our partners' remaining equity interest in our North American industrial fund, or NAIF, for $710 million and currently own 100% of this $3 billion vehicle.

Finally, we acquired an additional 25% interest in our Brazilian platform for $80 million and currently own 50%.

We expect to recapitalize our ownership in NAIF over time, providing us with about $1.8 billion of future incremental liquidity.

All of this activity is consistent with our plan to rationalize our funds into fewer differentiated vehicles.

We now have 10 funds, down from 20 in 2012.

During the same period, we significantly increased our third-party AUM and corresponding revenues.

And now, over 90% of our fees from these vehicles are perpetual life.

Turning to capital markets.

During the quarter, we completed 2 yen financings, underscoring our ability to access the global capital markets at very attractive levels.

This included recasting our JPY 50 billion revolver at a 40 basis point spread over yen LIBOR.

And we completed a JPY 12 billion unsecured loan at a fixed rate of 95 basis points and a term of over 10 years.

Our leverage increased to 36.7% on a book basis at quarter end as a result of deployment timing.

However, we expect to work this back down below 35% by year-end.

We ended the quarter with $3.8 billion of liquidity and remain well positioned to self-fund our future deployment.

Moving to guidance for 2017.

I'll cover the significant updates and then our share basis.

So for complete detail, refer to Page 5 of our supplemental.

We're increasing our forecast for year-end occupancy to range between 96% and 97%.

We're also increasing and narrowing the range for same-store NOI growth to between 4.5% and 5.25%.

The impact to development completions on our same-store pool is less than 50 basis points for the full year.

Our in-place leases continue to be 12% under rented globally, and this will be a significant driver of NOI growth going forward.

Cash same-store NOI growth should be higher than net effective by over 100 basis points for the year as the lag from longer lease terms and steeper rent bumps begins to close.

There is no change to our 2017 deployment guidance.

However, you should note that the acquisition of the remaining equity interest in NAIF is not included in these amounts.

For strategic capital, we now expect net promote income for 2017 to range between $0.12 and $0.14 per share.

The increase of $0.06 at the midpoint is due to rising property values from higher-than-expected rents and slight cap rate compression.

I want to remind everyone that there will be a mismatch between the timing of promote revenue and its related expenses.

As a result in the second quarter, you will see a net promote of $0.13 to $0.15 per share, with the remaining expenses recognized over the balance of the year.

Our 2017 estimated core FFO is fully hedged relative to the U.S. dollar, and we've already hedged most of 2018 and almost half of 2019.

We also remain well insulated from foreign currency movements impacting NAV as we ended the quarter with over 93% of our net equity in U.S. dollars.

With the strength in operations, higher promote and higher deployment, we're increasing and narrowing our 2017 core FFO range by $0.10 at the midpoint to between $2.72 and $2.78 per share.

The components of the raise are driven by $0.06 from promotes, $0.04 from operations, $0.01 to $0.02 from net deployment timing, offset primarily by slower development leasing in Brazil.

Our revised guidance represents a year-over-year increase of 7% at the midpoint, or 8% higher, excluding promotes.

The success of our strategy of having the highest quality assets and infill locations is evident in both our financial and operating results.

2017 is off to a great start, and we remain focused on continuing to drive growth while further simplifying our business.

With that, I'll turn it over to Hamid.

Good morning, everyone.

As you just heard from Tom, we had another great quarter.

The strategies we put in place years ago, combined with strong market fundamentals and relentless execution by our team, will lead to continued good performance in the foreseeable future.

In my commentary, I'll touch on some nuances on the margin, but the basic message is that our business is strong.

And absent an external shock, we expect it to remain that way for quite some time.

Looking at the current market dynamics, following a period of accelerating demand last year, the U.S. industrial market leveled off to a more sustainable pace in the first quarter.

Demand was broader than just e-commerce and was driven by other sectors such as housing and transportation.

This picture would have been even stronger but for several retailer bankruptcies.

Turning to supply.

I'd like to flag a few markets where we see some risk.

In the U.S., strong demand and sub-5% vacancies seem to have encouraged elevated levels of spec development in some regional markets like Indianapolis and Louisville as well as larger markets like Dallas, Houston, Atlanta and Southern California's Inland Empire.

Public REITs have remained disciplined, accounting for just 16% of spec starts in the first quarter.

By contrast, the handful of merchant developers backed by institutional capital are fueling this wave of development.

After 7 years of demand outpacing supply, we still expect to reach equilibrium in 2017.

But given the number of new starts underway this year, we now expect supply to slightly outpace demand in 2018.

Nevertheless, it's key to remember that a market in equilibrium at 5% vacancy still translates into pricing power for quality properties in the right locations.

For us, Europe continues to benefit from a favorable supply-demand balance and record low vacancies, especially in the U.K., Germany and The Netherlands.

We expect Europe to boost our growth starting in 2018.

Development in Europe remained disciplined in the first quarter.

And in our case, 100% of our starts in the region were build-to-suits.

The exception to discipline in Europe remains Poland, with its low barriers to development and builders who continue to lure investors with artificially inflated headline rents.

Recently, I fielded many questions about the potential off -- potential relocation of manufacturing activities and its impact on our business.

I'd like to remind everyone that starting more than a decade ago, we began to realign our portfolio towards major population centers to take advantage of the consumption power in these regions.

With very few exceptions such as the border markets in Mexico and a tiny piece of our business in China, our holdings are oriented towards the consumption, not the production and to the supply chain.

As a result, our logistic real estate is increasingly the last touch on goods before they reach the customer.

While we are monitoring policy developments around the world on tax and trade, we remain as convinced as ever that our focus on high-barrier markets, where land is scarce and new development is expensive and where more than 85% of our portfolio is located, will help us deliver strong relative performance over time.

To conclude, we continue to have a positive outlook for 2017.

Our strategy to own top-quality logistics real estate in sought-after locations near consumers has never been more relevant.

Over the next few quarters, we'll continue to show high quality and location can create a strong foundation for sustainable earnings growth in the years ahead.

With that, I'll turn it over to Kim for your questions.

Hello, Kim?

Hello?

Operator?

Hello?

So can the participants hear us?

Is there a way somebody can send one of us an e-mail or something?

I don't know what happened to the operator.

(Operator Instructions) Your first question comes from the line of Rob Simone.

Hamid, did I hear you right that you expect supply to outpace demand next year?

Yes.

Best guess, I think, demand will be in the low 200 million feet in the U.S. in supply, which is not a lot of guesswork by the way.

You kind of know what supply's going to be out 12 months, going to be 14 months.

I think supply is going to be like 2 30 to 2 45.

So maybe...

And -- oh, sorry.

I was going to ask, do you guys have a view for kind of what that may mean for the pricing environment and your rollup?

Nothing.

I -- in terms of our forecast, we were pretty much counting on supply exceeding demand in that sub-5% vacancy market in 2018-2019 time frame.

And we're not releasing anything new.

We just don't want anybody to be surprised when supply finally responds to demand.

And the issue is, I would say, focused on maybe 5 or 6 markets and a few players.

Your next question comes from the line of Sumit Sharma.

We've been tracking some of the demand for logistics assets in Europe and, I guess, across the world.

And I've recently noticed more discussions on last mile delivery, particularly as it works in the continent.

I think Amazon was out over the -- in the headlines over the weekend with some 1,300 last mile warehouses needed in the continent, I guess.

So I just wanted to get a sense of how your portfolio, specifically the European portfolio, is positioned in terms of last mile versus, let's say, bulk?

And second, I guess, how does the CBRE coventure feature into this equation as it applies to the U.K. side of things?

Okay.

That was 2 questions, but since they destroyed your name, we're going to let you get away with it.

So let me start with the last one first.

The U.K. joint venture is purely a -- the reason for it is that the capacity of our existing fund to absorb completed product is limited.

And our U.K. development machine can produce some very good assets at very good margins.

So we needed a home for our excess development volume in the U.K., and that was the purpose of forming this venture.

So it's very, very simple.

With respect to the last mile industrial real estate, let me give you the cynical view and my view because there are 2 views out there.

The cynical view is that everybody is calling their not so great real estate that's old, obsolete, poorly located, last mile and putting some shine on it to get better cap rate execution on sale.

I can assure you that's not what we're doing.

We are very deliberately going after the last mile opportunity by actually investing in infill sites in major metro areas around the world, but specifically in the U.S. and Europe, and to redevelop and then supply assets to do multistory buildings in these land-constrained locations.

In fact, we had our groundbreaking on our first property of this type in the U.S. last week in Seattle.

And you can expect us to have further announcements of these kinds of properties.

And if you remember, we basically had a -- 2 company strategies coming together.

Before the merger, AMB was very much more of an infill large market player, Prologis was much more of a bulk player.

We have now rationalized those 2 portfolios coming together by reducing everything down to the global market, but there is still a very large component of near infill last mile, last 5 miles, whatever you want to call it, the name is not important.

But infill real estate in major -- in metro areas which were predominantly the old AMB assets.

Now AMB's presence in Europe was lower than Prologis'.

So I would say the mix of those opportunities are greater for us in the U.S. than in Europe, but we are just as deliberate about those opportunities in Europe.

And you can see us getting after that opportunity in a major way with some initiatives that we have ongoing right now.

Your next question comes from the line of Blaine Heck.

Just wanted to talk a little bit about the uptick in same-store NOI guidance.

I guess, it was a little surprising given that you saw same-store expenses tick up a little higher this quarter than they've been running.

Maybe for Tom, can you talk about whether the increase in expenses was expected?

And what's driving that increase?

Yes.

The increase in expenses is primarily due to just higher real estate taxes.

You see the offset in revenues as well.

So they're recoverable.

It had about a 30 basis point impact on revenue, so quite small actually.

So same-store revenue growth was still over 4% without that.

So nothing to look into the expenses.

It's really a matter of a little bit of timing and mostly the real estate taxes, but don't expect that to be a trend this year.

Your next question comes from the line of Jamie Feldman.

Hamid, you had commented on retailer bankruptcies may be dragging on some of the demand in the quarter.

What are you seeing across the markets, maybe specific markets, and maybe what your expectations are going forward?

Yes, Jamie.

I don't know if I have any unique insights on retailer bankruptcies.

Let me give you the statistics in our portfolio.

We monitor credit loss pretty carefully, and we underwrite every tenant's credit in every industry sector.

We -- in our typical pro formas, we assume about 0.5% credit loss.

We're running at 20 basis points.

So we're significantly below trend.

And for those of you who have been around long enough as you have, in the global financial crisis, we got up to the low 1% range in terms of credit loss.

So if you pinpointed to what some people refer to as troubled retailers, our exposure to those guys is less than 1/2 of 1% of the portfolio.

And frankly, in a lot of those instances, we would rather they gave up the space than stayed in the space.

So I don't -- that's not on my first 3 pages of issues I worry about.

Your next question comes from the line of [ Nick Yulico ].

Can you just quantify a little bit more the impact of consolidating NAIF?

And also, what was the benefit to full year FFO?

And then from a yield basis, it's -- it looks like it might be -- you gave some of the pro forma NOI adjustments.

It looks -- it's not clear if that was for a full quarter or not, but looks like you bought it at around a 6 type of yield.

Is that correct?

This is Tom.

I'll take that.

So first of all, from the impact of the earnings on the year, you've got to look at deployment in total.

So as I said in my prepared remarks, we see deployment higher by $0.01 to $0.02 for the full year.

Clearly, NAIF is part of driving that increase.

However, we've also talked about -- I mentioned that we're accelerating sales as well.

So from a timing perspective, those are offsetting to about $0.01 to $0.02 a share.

The impact for the quarter in our -- the EBITDA that we show in the supplemental, we do pro forma for a full quarter impact of that.

So you are seeing the full quarter impact of the NAIF transaction in our stock.

Yes.

And the real cap rate, the way we count it was mid-5.

But given that the portfolio was pretty well occupied, the actual cash yield was higher than that.

Your next question comes from the line of Tom Lesnick.

Hamid, I appreciate your comments earlier about the shifts in supply and demand and calling out a few markets there.

I guess bigger picture, with the potential repeal and/or replaces Dodd-Frank and the relaxation of lending standards, do you think that the investor base this time around will remain more self-disciplined?

Or do you think that the banking system will really have to be the governor once again?

Well, I think Basel III is actually the bigger governor then Dodd-Frank, so they need to obviously count based on risk-based capital rules.

And that just makes the business less profitable than it was before, given the reserve requirements they need to retain.

So I think there's that general backdrop anyway.

As to people's discipline, I don't know.

I mean, memories are not very long in this business.

But I think the business has really, really changed in other ways than just the banking system.

I think land is much more difficult to come by.

The cities are getting much, much tougher on land, and those are tougher and more expensive.

So the average cost and size of the investor building is going up.

So the barrier for entry of smaller players is now higher.

There's a ton of information.

I mean you get on this call and there are 200 people on this call, right?

So all of them just heard me say that I think supply is going to be a different picture in the first quarter of next year.

And there are some people that are potentially getting a little bit over their skis.

Well, guess what?

That word will get around pretty quickly.

Now I don't want to give too much credit to Prologis and our role on this call, but I think there are just so much information around that investors cannot escape the reality of what's happening to these markets.

And frankly, they are accountable to their investors.

So pretty soon, they're going to get calls from pension funds of why you're putting out money when the largest player in the business is saying that the market is getting softer.

So I think it's just a different environment than it was in the last cycle.

Your next question comes from the line of David Rodgers.

And Hamid, maybe -- I don't know if Gene and Gary want to take some of this, too, but I wanted to ask about rent growth and retention.

Clearly, you've been driving retention down and driving rents higher.

You're down to that point of about 75% retention overall, I think, in the first quarter.

I guess maybe just give us a sense for how that compares across the regions, and then also if you could just kind of talk about how that might level off here in terms of the pushback that you're seeing from tenants moving into the second quarter.

Yes, David, it's Gene.

Let me start, and Gary can pile on.

So historically -- we got to put this in context.

Historically, 75% retention is the number of people actually seek to achieve.

So that's a very, very solid level.

Now we've been at elevated levels, obviously, in the 80s for many quarters.

And if you look at a trend line, we're headed down, but I am perfectly comfortable with mid-70s.

Frankly, I'm comfortable with probably 70 or even a little bit below that.

Because what we're asking the teams to do today is really push rent and be more aspirational in this environment where we have vacancy rates that we've literally never seen before in many, many markets.

So I wouldn't be concerned about the direction.

And so far at least, our activities in terms of pushing rents are bearing fruit.

And look at the rent change numbers, look at that.

In terms of how that's distributed across the Americas, I'd say in the U.S., frankly, it's pretty consistent across markets.

In Mexico, we have much more trouble pushing rents right now.

That's really a peso effect.

And Brazil has a challenging economic and political background.

They're not pushing rents there at this point.

But Gary, I don't know if you could add...

Yes.

I'd say for Europe, we're in a position today where we are trying to push rents in most markets.

You can see that coming through our numbers.

Obviously, occupancies are high.

From a market rent growth perspective today, Europe, in 2017, we're forecasting of just under 2.5%, accelerating Europe to above 3%.

So things are heading in the right direction, certainly in Europe.

In Japan candidly, market rent growth is probably around 1%.

And we're forecasting it would be about the same next year.

It'll be different market to market, stronger in Tokyo, less strong in Osaka.

And in China, again, market rent growth is accelerating.

It's probably around 3.5% today.

It's going to go over 4.5% next year.

So I'd say, arrow up on market rent growth.

And given the strength that we're seeing in occupancies, we will be pushing rents in most of those markets as well.

The only comment I have to add is that if retention are coming at 80%, I would have been all over these guys that we're not pushing rents enough.

I mean frankly, we've been running it too high and just taking the rents as they come.

So we're pushing term.

We're pushing credit.

Somebody -- if we have the least bit of concern on renewal with a tenant, we're going to replace them with a high credit quality tenant.

So I look at the lower retention as a positive sign, and I actually wish that it were even lower right now.

Your next question comes from the line of John Guinee.

This is a development question.

I'm looking at Page 23 and Page 26 of your supplemental.

First, on the land, it looks like half of your land at share is South Florida, Central Valley, Mexico, Brazil, United Kingdom and Japan...

Well, you just covered half the world's economy.

Do you own the right land in the right markets?

And then the second question, as a sort of a second part of this question.

If I'm looking at your development portfolio, can you give a little more color on what you're building where?

For example, you've got 6.2 million square feet under construction in the west at $76 a square foot, which seems kind of low to me.

Exactly where is that development being built?

All right.

Let me make 2 general comments and then turn it over to the guys for more specific color.

First of all, the -- seriously, the markets that you went through: Japan, West Coast, Florida and all that, if you add them all up together, they are probably half the world's economy.

But there are 2 really, really big and significant land positions we have.

One is Beacon Lakes in Florida and one is Tracy, which is the -- and which relates to your $76 a foot type question.

It is low because the land in Tracy, at this point, is pretty much free because we've pretty much returned our total investment on that land.

And I know the accounting doesn't quite work that way.

But the land at Tracy is like a good $30 a foot of [ FAR ] on their market.

So it should be $100 a foot, and it's $70 because we got a really good price of land.

And by the way, we'll -- we have another 800 acres of it for free.

So that's -- you can see us do a lot of business at very attractive land bases over there.

Beacon Lakes is not quite as dramatic as that, both in terms of size and the advantage of the land value, but it is significant.

And those are the 2 large pieces of land.

Do you guys want to talk about specifics?

Yes.

I mean, just to give you a little color.

John, this is Gene.

If you look at the overall land bank, we have too much land in Mexico.

And we're working that down as quickly as we can.

We have a lot of land in Brazil, but we control much of that through effectively land JVs.

So we're not only carrying that land.

That's going to be -- we're going to make a lot of money on that land over the next 5 years.

Obviously, in the last couple of years, not much activity.

And in terms of sort of what we are building where, I mean, Hamid pretty much answered the question.

The low cost per square foot is driven by really 2 things: one, we have a ton of activity out in our (inaudible) and Tracy, California, which is in the Central Valley.

And secondly, we have a really, really high percentage of build-to-suit right now.

I don't know, Mike, if you have some color on that.

But build-to-suits tend to be bigger, and they tend to have lower values per square foot.

Maybe just to tie it all together for a broader view, John.

Overall mix globally is going to be 45% in the Americas, 25% Europe, and 30% Asia, which is very comparable to last year, off to a good start with margins in the quarter at 19%.

Expect those to normalize in the 16% range over the year.

As Gene commented about build-to-suits, we were at 77% build-to-suit in Q1.

That was a function of a lot of -- continuation of a very successful build-to-suit program.

Expect that to normalize over the year in the mid-40s.

But I would expect that to be higher than our build-to-suit percentage last year.

So kind of net-net, I think we feel, once again, good about the mix and the quality of our development volume and reported a good year on that.

On the overall land balance, I would say there's $150 million of land that we have that I would not buy all over again.

I think the rest of it, we're totally good with, and we think is going to be a great driver of growth for our portfolio.

But there's probably $150 million of it that with the benefit of hindsight, I wouldn't buy and would be disposing over time.

Which is less absurd that we had with the merger of that stuff, so we've got through a whole bunch of that.

Yes.

Your next question comes from the line of Craig Mailman.

Just curious.

Looking at the starts in Europe, it looked like it was 100% build-to-suits.

And I know you guys have been pretty positive on what you're seeing over there.

I'm just curious if this is a trend that's likely to continue.

And maybe what it really indicates here as you look at the existing stock versus kind of the tenancy that is due to more than the build-to-suit with you guys.

And where are those build-to-suits?

Are they more infill?

Or are they more bulk?

Yes.

I'd say that they're -- look, we are 100% build-to-suit.

We're not forecasting 100% build-to-suit for the full year.

I think we're going to end up somewhere between 50% and 60%.

Just like last year, they're spread all around Slovakia, The Netherlands, Italy and the U.K. So I mean going back to the earlier question, is our land in the right place?

Of course, it is.

If you're doing 50% to 60% build-to-suits on land that you own, by definition, your land is in the right place.

Most of this I would describe as infill as opposed to bulk.

Candidly, most of this had to do with retail.

It was apparel, it was consumer goods, and actually, one was automotive.

Your next question comes from the line of Manny Korchman.

Tom, a question for you.

If we think about your capital deployment, especially outside of guidance, so you have an event like the NAIF buyout, is there anything like -- outside that contemplated in or out of guidance, sort of a big bulky deployment like that?

And b, why are you excluding that from guidance?

So don't anticipate any other transaction like that.

That was not in our initial guidance because that came together quite quickly with discussions with our partner.

But don't anticipate any other large transactions like that during the year.

The reason why we don't put it in our guidance per se as an acquisition because those assets are already reflected.

They're consolidated on our balance sheet.

They're all there.

So we don't reflect them as an acquisition because we're not adding to our portfolio.

We're just taking a bigger piece of the portfolio.

So that's why we describe it separately and don't try to confuse our acquisitions, which are real incremental adds to our portfolio.

But these things, just to be clear, I don't want you to take from what Tom said that we're asleep over here and we're not looking at opportunities.

I mean if the right opportunity came along and we could buy it at the right number, or we could finance it appropriately at the right number -- and finance it appropriately at the right number, we would look at all of those opportunities.

And we have been looking at all those opportunities.

It's just that we don't know about any of them right now.

And -- but we're always looking, and we're always working on things.

Your next question comes from the line of Vincent Chao.

Just sticking with that line of thinking about the right opportunities coming along, just curious if there are other larger entities out there that are interesting right now outside of your funds.

Clearly, global logistics properties is undergoing a strategic review, but I'm just curious how that factors into the thinking.

We -- I can't think of a significant transaction in the industrial sector in the last 3 or 4 years that we have not looked at, thoroughly underwritten, and had a point of view on.

So you could expect us to be looking at everything.

Now we're very selective about what we pull the trigger on.

And -- but let's leave it at that.

Your next question comes from the line of Eric Frankel.

Hamid, could you -- I think the term last mile has certainly gotten some legs over the last few quarters, and it's generated a lot of investor interest in this sector.

Could you qualify the term further in terms of what type of functionality, what kind of demographics around the building would really qualify as a facility that would facilitate the delivery of packages to consumers?

Yes.

There -- it needs to be located in a market with a significant population and a high level of affluence, college education, Internet usage connectivity, et cetera, et cetera.

It needs to be dense.

It needs to be supply constrained either physically or politically because of the nature of its residents.

So putting all those filters on the markets in the U.S., I would say the top markets would emerge as San Francisco, Seattle, New York, Miami, possibly Chicago, parts of LA.

And the buildings, there's no rules that I can give you about the type of building you will be in terms of size or number of stories.

But the new varieties are likely to be multistory, though are probably not as important to have (inaudible) access than van and smaller truck access.

And they need to be near thoroughfares.

In terms of rent potential, it would be trading really significantly at a different price point at its, if you will, 10 mile out type of real estate.

In other words, there needs to be a pretty significant rent gradient.

There are some markets where being close to the center action or not being that far away from that don't have a rent gradient because basically, it's a very suburbanized market.

It's very spread out.

Like -- it's tough to imagine last mile in Houston, even though it's a big city and hits a lot of the other criteria because it doesn't have the supply constraints and the concentration of population in the neighborhoods.

It's very spread out.

So those would be the criteria.

And I got to tell you, there are -- it's unfortunate, and you've seen us use the word last touch more than last mile because last mile is really not last mile, it's the last 5 or 10 miles.

And it's really the last touch before you hit the consumer directly.

There is a lot of really awful old tired real estate that is being rebranded as last mile.

And we always get a chuckle out of that when we see these packages come around.

So a lot of those properties don't meet the criteria that I described.

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

So we talked a lot about like last mile and different markets and supply and demand.

But Hamid, when you look at the industrial landscape besides development just more market-specific and maybe asset quality, where do you think the best places are to put your capital to work?

And what I mean by that, is it still kind of A assets in A markets?

Or has it gone down to maybe A assets in B markets?

How do you think about that?

Okay.

The real estate market is not that different than the bond market.

When the waters are warm and calm, people get a lot of courage.

And people have really stretched for pricing of B assets.

All fear goes out of the market.

Junk spreads collapse.

The yield premium of not-so-great real estate collapses on top of prime real estate, et cetera, et cetera.

We have been in one of those environments for some period of time.

So I do think junkier real estate has had a rally just like junk bonds have had a rally.

When there's a little bit more fear in the marketplace and people sort of gravitate towards quality, those spreads blow out and prime real estate will do better.

We're not smart enough and we're certainly not agile enough at almost 700 million feet to trade around that.

You guys may be in terms of the stock, but we're not.

So we would need to set the strategy and execute on it because we can't trade around the size of portfolio we have.

Our view is that in the very long term, having infill real estate near these population centers and this quality locations with supply constraints wins regardless of possibly 1 year out of 5 or 2 years out of 5 when the junk rallies.

In the long term, you get much better adjusted returns by being in these markets.

And we think in our estimation, the cap rates historically, if you average it over a long period of time, have been far, far more than compensated for by the higher growth of those markets.

So yes, you pay the premium in terms of a lower cap rate in those markets, but you picked up double, maybe 250% of that in terms of incremental growth rate.

Just look at where you are today in Los Angeles or San Francisco with respect to those -- where those rents are compared to Memphis.

Just to begin -- Memphis, when I started my career in 1980s, the rents in Memphis were probably higher than they are today, but not in these supply-constrained markets that we've talked about.

So if you're playing a long game, not a quarter-by-quarter game, you want to have your money invested in supply-constrained markets where people want to live.

And this is going to become much more important as the winners in industrial space are going to be more on the consumption end because of e-commerce than the production end, which is the way the world used to work in the old days.

Your next question comes from the line of Neil Malkin.

Just given the focus on bias towards the end consumer, can you give us a flavor or feel for how much of your portfolio currently is that end consumer versus the bulk supply chain, and how that also stacks up in your development pipeline?

I guess, you could just focus on the U.S.

It is a continuum.

There's not a bright spot that one property falls in and one property falls out.

I think the best way of looking at that is to look at the global markets, which our share is now almost 90% in global markets, and the big regional markets.

We don't have any tertiary markets.

We've sold all of those.

Now within the major markets, about 1/3 of our portfolio is around 100,000 feet or lower.

And about 1/3 of it is in that 10 -- 100 to 250 range.

And the rest of it is in the 250 and up range.

I would exclude the 250 and up range even though I can think of a couple of larger buildings that are very infill.

But I would say 2/3 of our portfolio meets the consumption end.

I would say the production end, the other way of coming at it, other than our properties in the northern part of Mexico, very, very little production going on.

In fact, Chris, what's the manufacturing percentage in our portfolio today?

Less than 5%.

Less than 5% of our portfolio is oriented towards manufacturing.

So by definition, the rest of it is on the consumption or in the wholesaler end of the supply chain.

Your next question comes from the line of Rob Simone.

Tom, this one might be for you, but I was wondering if you could expand a little bit on the tick-up in free rent this quarter over last quarter?

I think it is about 20 million versus 14 million last year.

And I guess given where your guys' occupancy is today and that most of the leasing have already been completed, I guess you would have expected that to tick down.

So I'm just looking for additional color in what should we expect going forward.

Yes, good question.

So when we report free rent, straight line rent, that's reported on leases that commence in the quarter, so which is different than what we report when we lease signings, right?

So the leasing activity report as lease signings.

The straight line rent, free rent is a function of leases that commenced.

So when you look at Q4 versus Q1, Q1 has almost 50% more lease commencements happening, right?

Q1 is our biggest roll.

We signed those leases well in advance of Q1.

So the signings showed up a quarter or 2 ago, but the actual commencement is what triggers the straight line rent, free rent rents.

So that's what driving that aspect of it.

When you look at concession, I don't have the numbers offhand, but concessions are clearly continuing to tick down, right?

Even though you're seeing those numbers grow, it's a function of commencements, but it's also we're signing longer leases.

Leases are also increasing, right?

Rents are going up dramatically.

All that increase is your nominal amount of rent.

But when you look at that concession relative to the whole value of a lease, clearly, they're ticking down.

Well, we were just having this conversation earlier.

We're going to just put that out in the package next time and show its trend over time because it's obviously a question that comes up every call, and we can just show it to you.

Your next question comes from the line of Sumit.

So sticking with the whole cynical thing and not looking at the bright side of life from the Monty Python thing, I guess how much of -- we've spent a lot of airtime on last mile, and definitions have been exchanged.

And you mentioned a bit about multistory warehouses.

I guess what I'm wondering is how much of this stuff is -- if you look at some of the experience in London versus Asia, Asia has -- it's done well, better than London.

It's been viewed as a bit of a science experiment, particularly some properties next to Heathrow had issues with ramps and such.

So how do you sort of mitigate that as you are looking towards hoping more builds of that nature in the U.S., judging by your comments?

So let me give you a story, which you may find amusing.

But the developer of MX2, which is the building you're referring to London, went to Singapore, this is now almost 10, 12 years ago, literally asked us to give him a tour of our ALPS project in Singapore, which we did.

He took the plans and built the same building in London without thinking about the differentiated truck sizes in those 2 markets, which is why MX2 stayed unleased for as long as it did.

That's a story you can file away.

The person in question is no longer in the business.

So that's what happened, that's building -- why that building didn't lease.

It was the wrong building in the wrong pocket.

I think it's all a function of land values.

I think when land values get to a certain point, multistory will make sense.

And there are a few markets in the United States that are approaching that point.

Obviously, in Japan, you've got the benefit of smaller trucks and very high land value.

So that's why you see the 5- or 6- or 7-story building.

I think you're not going to see that in the U.S. anytime soon, certainly not in my career, in bulk.

Oftentimes, people have asked, what's the size of that opportunity?

I think there are probably 5 or 6 obvious markets in the U.S. where that opportunity exists.

I think I mentioned them all before.

In those instances, it is not hard to imagine that eventually, you could have a portfolio of 3 million, 4 million, 5 million square feet, and I'm talking 10 years out.

So if just for thinking purposes, if you've got 5 or 6 cities at 3 million to 5 million, you've got 20 million to 30 million feet of product that is multistory in these major markets.

And the value of that product is about double what it is for a traditional industrial product in our portfolio.

So in terms of value, it could end up being about 10% of the business, kind of order of magnitude, incremental over time.

That's the best I can do to size the opportunity set for you.

Time will tell how successful we will be, but I think we'll be really successful.

Your next question comes from the line of Eric Frankel.

Just 2 very quick follow-ups.

So one, what is -- for your multistory development in Seattle you just started, I mean who are your -- who are the tenants that could possibly take that?

I can only think of 3 at this point that are really big parcel delivery companies, so it's Amazon, UPS and FedEx.

And then second, on the supply front, do you see opportunities down the road for potentially helping some of these developers recapitalize the projects that they feel like they got over their skis, and the profits that developers have underwritten are maybe a little bit aggressive?

I think those developers will do fine because they've got some institution's money and it's the old-fashioned game.

If it works on the upside, they have a promote and equity interest.

And if it doesn't work on the upside, they've got some -- upside, they've got some fees and -- got going for a while and the institution, which is oftentimes a pension fund through an adviser, ends up beating it.

So I don't think there's going to be a lot of distress because these are, by and large, not heavily bank financed deals.

These are more institutionally financed types of deals.

So I think you'll have some disappointing returns for the investors.

And hopefully, they won't finance the next round of development.

I think that's going to -- how it -- that's how it's going to resolve itself.

In terms of your first question, could you repeat the first part of your question?

Customer composition.

Just stay tuned.

I think our issue right now is trying to figure out how to respond to the interest in that project.

So when I'm at liberty to talk about it, I will.

Your next question comes from the line of Manny Korchman.

Just wondering in terms of demand from capital or institutional investors for product.

I think, Hamid, earlier, you had said that there's sort of demand ahead of the supply.

And so developers are getting comfortable building more supply.

If we were to take that same sort of analogy, I guess, and think about capital, is there more capital chasing assets than there are supply of assets?

Is that a fair assumption?

Well, yes.

And that's why cap rates that we keep saying are stabilizing are going down, I mean, because the weight of capital pushing those cap rates down.

But we don't -- we're not building our business around cap rate compression and rents growing at 10%, 12% a year like they have been.

I think we have shared our assumptions with you.

They're essentially based on flat or slightly uptick in cap rates and moderate rental growth.

It varies by market, but sort of in the 3% to 4%, 5% range in the U.S. market-by-market.

This is market rent.

Same-store will actually be pretty much baked in that somewhat higher because of the mark-to-market obviously, but happy to go through those assumptions.

But we're not building a business around the market being exuberant going forward.

I think our assumptions are much more sober than that.

Jamie (inaudible)?

There are no further questions at this time.

I turn the call back over to the presenters.

Okay, great.

Thank you for your time and interest in the company, and good luck with earnings season.

We'll see you all around pretty soon.

Take care.

This concludes today's conference call.

You may now disconnect.