Prologis Inc (PLD) 2017 Q4 法說會逐字稿

Welcome to the Prologis Q4 Earnings Conference Call.

My name is James, and I'll be your operator for today's call.

(Operator Instructions) Also note this conference is being recorded.

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

Tracy, you may begin.

Thanks, James, and good morning, everyone.

Welcome to our fourth 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 then Hamid Moghadam, our Chairman and CEO, will comment on the company strategy and outlook.

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

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 on our 10-K and 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.

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

Thanks, Tracy.

Good morning, and thank you for joining our fourth quarter earnings call.

I'll cover the highlights for the quarter, introduce 2018 guidance, and then turn the call over to Hamid.

We had an excellent quarter and an outstanding 2017.

Core FFO was $0.67 per share for the quarter and $2.81 per share for the year, reflecting an increase of more than 9% over 2016.

We earned a record net promotes of $0.16 per share for the year.

Excluding promotes, core FFO was also up 9%.

It's worth taking a step back to highlight that over the last 4 years, we delivered a core FFO CAGR of 13% while also deleveraging by 1,100 basis points.

We leased nearly 170 million square feet in 2017 with more than 42 million square feet in the quarter.

Well-located logistics product remains mission-critical for our customers.

Global occupancy at year-end reached an all-time high of 97.2%, a sequential increase of 90 basis points.

The U.S. led the way with a record occupancy of 98%.

In Europe, year-end occupancy reached 96.6%, up 120 basis points sequentially, setting the stage for rental growth in 2018.

Notably, France was up 340 basis points sequentially.

Our share of net effective rent change on rollovers in the quarter was 19% with the U.S. at nearly 30%.

Global rent change was down sequentially due to mix with higher leasing in France, Poland and the central U.S. Our share of net effective same-store NOI growth was 4.7% for the full year and 4.1% for the quarter.

The quarter came in below expectations due to an expense forecast miss as well as lower-than-expected average same-store occupancy.

On the development front, we had an extremely productive year, creating significant value for our shareholders.

I'd like to highlight development stabilizations, which came in slightly ahead of expectations and had an estimated margin of 29% and value creation of $583 million.

2017 was also an excellent year for our strategic capital business.

We combined several ventures, reducing the number of vehicles since the merger from 21 to 8, further streamlining our business.

We raised $2.9 billion in new capital from investors around the world and grew our third-party AUM to $32 billion.

Our strategic capital business delivers a durable and consistent revenue stream with 90% of our fees coming from long-term or perpetual vehicles.

Turning to capital markets.

During the quarter, we used a portion of our excess liquidity to redeem $788 million of near-term bonds.

For the full year, we lowered look-through leverage by 340 basis points to 23.7% on a market capitalization basis.

We continue to have significant liquidity of $3.6 billion and remain well protected from movements in foreign currency as we ended the year with more than 94% of our net equity in U.S. dollars.

Moving to guidance for 2018, which I'll provide on an our share basis.

We expect net effective same-store NOI growth of between 4% and 5%.

This is set in accordance with the new logistic sector definitions that we announced last week.

I'm proud of our sector for taking leadership on this important initiative.

For comparison, our 2017 net effective same-store results would have been 4.2% under this new definition.

As I had mentioned previously, we had expected this impact to be less than 50 basis points.

Cash same-store NOI growth for 2018 should be approximately 100 basis points higher than net effective as the lag from longer lease terms and steeper rent bumps continues to close.

Development starts will range between $2 billion and $2.3 billion, roughly in line with 2017.

Build-to-suits will comprise about 45% of this volume.

Dispositions and contributions will range between $2.3 billion and $2.9 billion.

Given broad buyer interest, particularly for larger portfolios, we may elect to accelerate dispositions and effectively close out our remaining nonstrategic assets in 2018.

I want to point out that the contribution volume includes the expected recapitalization of Brazil.

For strategic capital, net promote income will range between $0.05 and $0.07 for the full year.

Consistent with prior years, there will be a difference in the timing of recognition between promote revenue and its related expenses.

We expect to recognize $0.01 of promote expense in each quarter of 2018.

From a timing perspective, we expect to recognize roughly 2/3 of the promote revenue in the first quarter.

For net G&A, we are forecasting a range between $227 million and $237 million.

For perspective, we have held G&A roughly flat over the last 5 years while growing AUM by more than $14 billion.

Related to FX, our 2018 estimated core FFO is fully hedged and we have already hedged most of 2019.

We don't expect any material impact on our operations or earnings as a result of the new tax reform bill.

Putting this all together, we expect core FFO to range between $2.85 and $2.95 a share for 2018.

Core FFO growth, excluding net promote income, is expected to be 7%.

This growth is particularly strong, given further balance sheet delevering.

We expect average leverage in 2018 to be approximately 200 basis points lower than last year.

For reference, a 100 basis point increase in leverage translates to approximately 1% of core FFO growth.

To wrap up, we had a great quarter and year and are entering 2018 with strong momentum.

The mark-to-market of our portfolio currently stands at 14% globally and more than 18% in the U.S. with an upward bias.

This positions us for strong operating performance for the next several years.

Our best-in-class balance sheet has significant liquidity and investment capacity to self-fund our growth and to capitalize on opportunities as they arise.

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

Thanks, Tom.

I'll keep my remarks short as our business and our markets continue on a positive trajectory.

Market fundamentals are as strong as they've been in my career.

In the U.S., occupancies continue to test new highs and rental growth accelerated in 2017, led by the large coastal markets.

Net absorption was healthy last year, although it was constrained below 2016 levels as a result of limited new supply.

Market dynamics today are highly favorable to Prologis and should remain so for the foreseeable future.

Today, about 30% of our global portfolio consists of infill assets, which are positioned for last-touch delivery.

In our view and notwithstanding all the market noise, it will be impossible to duplicate such holdings in any scale for late adopters of the now very popular last-mile strategy.

In Europe, cap rate declines have lifted values significantly.

While we expect cap rates to compress even further, we have now reached an inflection point for rental growth in Europe.

Fueled by improving conditions on the continent, we expect rents to accelerate for the foreseeable future and narrow the gap with the U.S. The lag in rental recovery in Europe will carry our momentum beyond the inevitable point that the U.S. markets normalize.

Looking ahead, there's plenty of gas left in the tank.

We are laser-focused on capturing rental growth and deploying capital in profitable developments.

The mark-to-market of our portfolio has increased steadily over the last 18 months, which will also extend the runway for continued rental growth.

Our scale provides us with attractive capital sourcing and deployment opportunities around the world.

We'll continue to deliver value by putting our well-located land bank to work and by leveraging our unparalleled customer relationships.

I'll close by saying that our business strategy remains unchanged.

Our balance sheet continues to strengthen and our portfolio is uniquely positioned to deliver strong results well into the future.

We remain vigilant about unforeseen risks in this environment but are very optimistic about our prospects in 2018 and beyond.

I'd like to now turn it over to the operator for Q&A.

(Operator Instructions) Our first question, from Manny Korchman of Citi.

Hey, it's Michael Bilerman here with Manny.

Tom, in your comments, you talked about the 4Q same-store numbers and you referenced an occupancy miss and expense growth miscalculation, or I can't recall what word you used.

Can you just delve a little bit deeper into what those were, what impact they had and how that reverts into 2018?

Yes, thanks, Michael.

So about half of the difference was due to the fact that we blew an expense forecast by about $2.5 million, which -- in the fourth quarter, which had about a -- that's about 60 basis points impact.

And again, we just -- we blew the expense forecast.

We got it right in 2018, so no impact on 2018.

The other driver was same-store average occupancy was lower than we had expected.

We actually had a 10 basis point negative impact of same-store occupancy in the fourth quarter.

We thought we'd see a positive increase.

But to give you context, our share of average same-store occupancy in the quarter was 96.5%, but our ending same-store occupancy was at 97.3%, so 80 bps higher.

So as you can see, we -- the leasing happened just later than we expected.

Our next question is from Craig Mailman of KeyBanc.

On the occupancy guide, Tom, just curious, how much of that is just conservatism from where you guys ended the year versus maybe your expectations about lower retention from kind of pushing rents even harder in '18?

Yes, I think it's the latter, Craig.

We're going to continue to push rents to get the right long-term economic results and higher same-store growth.

And we might sacrifice occupancy in the short term, just like you saw in Q4.

But we're getting the right long-term answer.

Our next question, from John Guinee of Stifel.

If you look at what's happening in the office world and the retail world, base-building and re-leasing CapEx are going up significantly.

And investors' awareness of these CapEx numbers are also going up significantly.

When you're leasing space, are you providing turnkey TIs as when TIs are needed?

How much money are you putting into the base building?

How much money is the tenants putting into the base building?

Talk a little bit about your re-leasing cost.

Sure.

John, this is Hamid.

Let me start, and then turn it over to Gene for some color and the specifics.

I think the real estate industry generally, for the last 35 years that I've been involved in it, has always gotten CapEx wrong because I think there is all these weird things that people count as recurring, not recurring, value-enhancing, not value-enhancing.

And I think those problems are particularly acute in the sectors you mentioned.

I think probably apartments and industrial are the most straightforward because we don't have major lobby rehabs and all those kind of other stuff that goes on.

So generally, the problem that you raised is a serious problem that AFFO many years ago tried to address, but in my opinion, didn't do a very good job on.

So that is the general comment.

I would say many of our tenants invest, above and beyond our contribution, significant improvements.

Typically, our improvements, once the building is second generation, consists of paint and carpet and maybe a little bit of walls moving around in the office portion, very little in the warehouse space.

Now we have customers that may put in nothing above that.

And there are a couple of occasions where our customers are actually using the buildings for data centers and may put $1,000 or more a square foot in there.

But that's really not reflected in the rent that we collect.

We are not in the business of over improving space at our expense in temporary and specific customized improvements for anybody just to pump up the rent.

I just want to be really clear about that.

And just to be -- just to make this really simple, the way I'd like to look at CapEx is actually to add up all the CapEx and look at it as a percentage of NOI.

And historically in our business, that number has been about 12% to 15%, depending on where you are in the cycle.

Our next question, from Blaine Heck of Wells Fargo.

You guys have come a long way derisking and delevering the balance sheet over the last several years.

And it looks like you plan to continue that process in 2018.

As you touched on, it usually comes with lower growth than you could achieve at higher leverage.

So how do you guys think about setting the appropriate level of leverage and timing the balance between safety and growth?

So Blaine, I think when we did the merger and we laid out some balance sheet objectives, that was really where we thought the long-term capital structure of the business was going to be.

And I think at the time, we said we wanted to have a top 3 balance sheet in the industry and got a lot of giggles at that point.

And here we are now with just under 24% leverage and an A- rating, which we're happy about.

I think the recent decline in 2017 and the projected declines in 2018 in leverage are not something that we're doing consciously to further improve the balance sheet.

They're just a by-product of executing our capital recycling strategy.

And you can't do that perfectly.

So at some point, when we are done with disposing of our nonstrategic assets, which we expect to have that completed in 2018, our leverage will probably drift up by a few hundred basis points, and thereby propelling our growth to where we really want it to be in the long term.

But that totally depends on investment opportunities and the attractiveness of those capital deployment opportunities.

Bottom line, our leverage is lower than we planned it to be.

But that's consistent with the other aspects of our strategy.

And our next question, from Dave Rodgers of Baird.

Maybe Tom, I wanted to go back to one of your comments that you made in prepared comments about accelerating dispositions of noncore assets as the year progress.

It sounds like that's not a done deal, but I'd like to know maybe what would get you over the hump of deciding to sell more.

Is that a function of perhaps accelerating developments or finding acquisitions or just maybe new supply hitting the markets that you might be worried about?

Any additional thoughts, please.

Yes, Dave, there is no hump to get over.

Just to put everything in context, we sold $11.6 billion of real estate since the merger.

I think that represents a couple of companies added in our sector.

So we've been very deliberate and active in the dispositions market, probably more than anybody in the business.

We have approximately $1.6 billion of nonstrategic assets left.

Bottom line, we sold 88% of what we wanted to sell in the nonstrategic area.

And honestly, the improvement in the markets and the strength of the market is such that we got a lot of these other nonstrategic assets leased up sooner than we thought we would.

So I think 2018 is the time to execute that plan.

Mike, do you want to add any color to that?

Yes, we saw last year, both in Europe and the United States, some of our smaller portfolios were aggregated.

There's a lot of buyer interest in some larger portfolios.

And so we expect that trend to continue this year.

And we're very optimistic on our ability to execute our sales plan or even slightly more than we projected.

Next question, from Nick Yulico of UBS.

Hamid, I wanted to get your thoughts on the new supply in the U.S. and which markets, if any, you might be concerned about.

Let me do this.

Let me have Gene start and maybe Chris to provide some color on that.

Yes, great.

So with respect to new supply, right now, we would call out probably Dallas, Chicago and Louisville as having supply in excess of recent demand.

And to drill into this a little bit, as we look forward, Chicago kind of concerns us a little bit.

But construction is way down in Chicago today.

So they had 22 million in the pipe a year ago, now they have 9 million square feet.

So that speaks to the conservatism we've seen in a few markets since the -- during this economic recovery.

Those are the markets we would call out for excess supply.

Our next question, from Jeremy Metz, BMO Capital Markets.

Hamid, at this time last year, your outlook called for supply-demand equilibrium, moderation in rent growth to the mid-single-digit range.

Rents obviously far outpaced expectations, coming in nearly 10%.

And in your own portfolio, occupancy reached an all-time high at the end of the year.

It was above even your expectations at the end of 3Q.

And this is all despite the fact you were actively really pushing hard on rents.

So it may be a very simple answer here.

But are you seeing anything today other than just being 1 year further into the cycle such that 2018 can be set up for a similar type of better-than-expected outcome?

Yes, the simple answer is no, we're not seeing anything different.

In fact, markets at this point are stronger than they were last year.

Last year, you may remember, there were a couple of markets that we have seen excess supply in, including by the way, Chicago that Gene just mentioned.

And we kind of talked about that, that we're in the market that maybe some of these markets are getting a little soggier.

And then as you point out, we ended up getting between 9% and 10% rental growth in the U.S. So we clearly got that one wrong and we were too conservative in terms of what happened.

But having said that, I mean, nobody is going to go and forecast 10% rental growth into the future.

We are in uncharted waters.

So I think that what we are counting on today is a growth rate much less than that.

And our assumptions in our guidance is based on numbers that are about half as much as big that this year.

But who knows, it may be higher or lower.

And we don't have perfect insight into the future.

So I don't know, we'll see.

My hope is that we'll even do better.

Our next question, from Ki Bin Kim of SunTrust.

Can we just talk a little bit more about the supply question?

How much do you think new supply actually impacts your portfolio?

And I'll use this as an example, for example, have an asset in Carson and L.A. by the Port of Long Beach, I wouldn't think new supply in Inland Empire east practically impacts your ability to raise rents in that asset.

So if you take that thinking across your larger portfolio, how would you describe the real impact on your supply?

So in some of the markets, like the South Bay, just to pick the example that you mentioned, it's impossible to add any supply.

In fact, there's supply coming off.

There's negative supply.

San Francisco has had negative supply because people are tearing down boxes to build apartments and all that.

So there's very little supply there.

And what happens is that there's substitution of locations as people go further out and compromise on some other parameters just to be able to get the space that they need.

So let me throw it to Gene for some more color on that.

Yes.

So you brought up an interesting point because if we actually look at our strong markets, there are markets with obviously strong demand and great net absorption numbers.

Some have decent amount of supply as well.

And then if you look at L.A. County, for example, the net absorption isn't very impressive, neither is the supply because it's infill.

But the rent growth is 17%, 18%.

So there are a couple of markets that fall in that category today, New York, New Jersey is one of them, 18% rent growth last year.

Much of the Bay Area falls in that category, Seattle.

So your question was originally about supply.

In many of these infill markets, supply is really one-off.

And as a percentage of what's going -- of the base is very, very small.

Yes, this is Chris.

Ki Bin, I think one -- the key differentiator in rent growth last year was barriers to supply, either by markets, coastal versus other, or in terms of product size, too.

You saw better performance in smaller versus bulk product.

But let's also now let the question go in terms of the rate of supply growth.

There has been a real slowdown in the rate of supply growth.

It starts last year, and for that matter, the supply pipeline, I'm sure numbers you follow, up 5% to 10%.

By contrast, in a market environment like we're discussing, historically it would have been double digits.

So there's just discipline in the supply side of it that also is affecting us.

The next question, from Eric Frankel of Green Street Advisors.

I just have a two-part question.

One, Tom, I'm not sure if you mentioned it, but what's the effect of the uniform guidelines on same-store portfolio construction have on '18 guidance?

And by the way, obviously appreciate you guys working on that together.

And then the second question, maybe for Hamid or Gene.

I think multistory constructions has become a much more popular topic in the United States.

Do you see any pitfalls for any competitors or peers in that strategy going forward?

I know you guys are obviously thinking pretty thoughtfully about it.

Eric, it's Tom, I'll go first.

So the impact on our same-store operating metric is about 40 bps in 2017.

So if you look at on a comparative basis, 2017 under the new methodology would have been 4.2%.

The midpoint of our new guidance under the new methodology for '18, the '18 midpoint is 4.5%.

So we are seeing acceleration on a comparative basis same-store year-over-year.

Okay.

And with respect to the multistory product, I'm not sure how popular it is.

A lot of people talking about it.

To my knowledge, there's only one multistory building being built in the U.S. But for sure, over time, there'll be more.

We've got a couple in the pipeline.

And it's all about land value and growth pressures, like the one Gene talked about in some of these infill markets that you know well.

So I think there's more talk than action.

These are not easy things to do.

I mean, eventually people will get the technology right.

But it's tough to find a 10- to 20-acre piece of land in a major metro area to build one of these things.

And all the mitigation measures and traffic and height limits and all that really make it difficult to do this.

So I think it's only in those markets where rents are sort of solidly in the mid-double digits, mid- to high-teens, low 20s, that it (inaudible) to do this kind of construction.

Eric, the only thing I'd add, which Hamid earlier implied, is the development schedule is much, much longer.

So this is an investment that requires a lot of patience and you're looking way into the future.

So I think it's a different type of development.

And I'm not sure a lot of people in this sector will ultimately jump in, very expensive and very long schedules.

Some of these things can be in the U.S., which is cheaper than Japan, can be easily $150 million, $200 million.

And couple of the ones we're looking at are $0.5 billion in investment.

I mean, they're kind of approaching good high-rise office-type numbers.

And I'm not sure there are that many people around that can write those checks.

Our next question, from Tom Catherwood of BTIG.

Following up on NAREIT, if I'm remembering correctly, I think the talk was that your portfolio was roughly 14% below market on a leased basis.

Given the 19% leasing spreads, kind of your share of those this quarter, what's that below-market leasing looking like as of now?

And how do you see it trending through 2018?

Thanks, Tom.

So as I said our current in-place to market today at the end of the year, 14% globally, over 18% in the U.S. The real -- 2 things you need to consider is roll and the composition of the roll and rent growth.

Those are the 2 drivers of what that mark-to-market -- how that will move.

Looking into 2018, I think there's an arrow up on the mark-to-market just as we're going to have about 20% roll.

And you look at the composition of that roll and, as Hamid said, thinking about 5%-ish global rent growth.

And so I think there's an arrow up on that number.

Next question, Vincent Chao of Deutsche Bank.

Just curious on the demand side if you're seeing shifts in where the demand is coming from over the past quarter or 2?

And maybe if you could just give us your best guess for the year and maybe for the quarter, what percent of your leasing has been more specifically for the e-commerce channel?

It's Gene.

I'll take that and others may want to jump in.

So the customer segments that have been active really haven't changed much over the last couple of quarters.

It's been transportation, construction.

Food and auto have also been strong.

And e-commerce, as a percentage of the demand, has also been fairly steady.

And as we look out into this year, that's a tough thing to predict because there are several participants in that sector who have big plans for new distribution rollout.

How much of that ends up being absorption in this year is really tough to say.

But I would guess on balance, I'd see an upward arrow for e-commerce in 2018.

But those other industries I mentioned, also very, very strong right now.

Just to add a little something on Europe.

European market continues to strengthen.

As Tom mentioned in his opening remarks, we saw significant leasing activity in Southern and Central Europe, which is a huge positive for us.

Demand is starting to pick up in those markets.

I think the important statistic in Europe is that market vacancies are down to 5.5%.

And we're forecasting them to go even lower in 2018.

So you should see increased opportunities for rental growth going forward.

I think construction, I think resi construction, resi-related absorption is going to be higher next year -- or I mean, 2018.

In the U.S.

Yes, in the U.S.

Next question, from Nick Stelzner of Morgan Stanley.

So occupancy decreased in Americas for, I think, the fifth straight quarter.

Can you provide some color on what's driving that?

And do you expect that to inflect anytime soon?

Yes, I think if you're looking at owned and managed, you're going to see Brazil drag that down a little bit.

If you remember, we consolidated Brazil in the third quarter.

And occupancy on that owned and managed portfolio was 78%, kind of staying there.

We obviously think it was a great time for us to get in there and get that portfolio.

And more to come on Brazil, but I think we're definitely going to see a turnaround there in 2018.

But when you look at the U.S., for example, in Q4, U.S. was a record 98% occupied, all-time record.

Right.

I mean, outside of Brazil, the occupancy, they were very high.

They were very high in Mexico, too, I might add.

Next question, from Joshua Dennerlein of BoA Merrill Lynch.

A question on your development pipeline.

Should we expect maybe a mix of -- a shift between spec and build-to-suit development going forward?

I was thinking maybe there would be more build-to-suit.

Josh, this is Mike.

Last year, we did about 47% in terms of build-to-suit.

As we look out over the next year, we expect to range in a similar zone.

And I think why you're seeing those high levels of build-to-suits, driven largely because of the dearth of type of space our customers want to be, particularly in global markets.

And we expect that to be a number that feels pretty solid for 2018.

Well, 47% historically is super high.

So probably the number across the cycle is more like 25%.

So I don't want anybody to get to used to those kinds of numbers.

We were surprised by that number being that high.

Next question, from Steve Sakwa of Evercore ISI.

I know there's been a lot of questions on development.

I guess, Hamid, I'm just trying to think through the land bank and your desire to get the land bank down but also continue the development pipeline.

How are you guys just sort of thinking about replenishing land today?

And what are you seeing in terms of land cost and development yields on kind of new land being purchased?

Yes, Steve, our goal is to get down to 2 years of development of land supply.

And our development guidance, I mean, it bounces around every year.

But you may remember -- actually, you will remember that back in 2010, the dark days, 2010, 2011, I think the first Analyst Meeting we had as a merged company, we've talked about development volumes between -- being between $2 billion and $3 billion in aggregate, not our share but in aggregate.

And that's exactly where we are.

We're now sort of around $3 billion in aggregate.

And roughly, the land that goes with that is about $750 million type of land, so about 1/4 of the total investment volume.

So if you literally want to own 2 years of land, that's about $1.5 billion of land.

And that's more land than we currently have on the books, maybe not in market value but at least in terms of book value.

So we're pretty close to our long-term goals with respect to land.

We may want to push it a little bit lower but not too much lower than where it is because we need that land to support our business.

Getting land is very, very difficult today in the markets that we care about the most.

The exactions, all the fees that people pile on, just the traffic mitigation measures and all that are getting to be really hard.

So some of these parcels of land, you've got to work on for a number of years before you get entitlements for it.

We're pretty fortunate that we have land for almost $8 billion, $9 billion of development on our books.

But on the margin, we've been adding land, call it, at the rate of maybe $400 million a year and chewing through land at the rate of maybe $600 million to $700 million a year, so whittling down the land bank by $200 million to $300 million a year.

And that's how we've gotten down to where we are.

About $150 million of our land bank is what we call C and D category land bank, probably more detail than you care about.

But those are essentially parcels of land that we inherited that we wouldn't have bought.

And those things are slower to absorb.

So you kind of mentally have to put $150 million of land bank on the side and say, "Look, we're not going to monetize that.

We're going to, over time, sell it probably to users and alternative uses." We've chewed through a lot of that land.

That number was more like $450 million when this exercise started.

So we're getting near the end of that.

But I kind of mentally figured out that, that's outside of the target land bank that we'd like to have.

Steve, the other thing to think about from land that you don't see show up in our land bank is our redevelopment opportunities.

So when you think about multistory, that's going to go on land that's either sitting in the operating portfolio today or sitting down in other assets.

I think we've done a really good job over the last 4 to 5 years of buying what we call covered land plays, which has some sort of income stream on it, whether it's a truck terminal or something like that, where we're going through entitlement, we're flipping a coupon.

So that's over and above the $9 or $10 billion of development build-out potential that we have that Hamid mentioned.

So there's more redevelopment opportunity there than just sits in the land bank.

Also we have an increased emphasis on option agreements, which we'll continue to add capacity to.

Next question, from Jon Petersen of Jefferies.

As we're thinking about tax reform and its impact on demand for warehouses, I'm just curious as you talk to your customers -- and I know you guys have a committee of customers you talk to, I'm not sure if you've spoken with them since the tax reform bill.

So I'm thinking about demand for leasing warehouse space.

And one aspect of it is expensing equipment over the next 5 years, and if that might cause businesses to accelerate growth plans and buy equipment that will obviously need warehouses to go in.

I don't know if you have any bigger thoughts on the tax reform bill, maybe not specifically, and what it means for warehouse demand.

So we essentially get 2 questions about tax reform.

One is the one that you asked.

And let me just answer that one.

No, we haven't had a customer advisory meeting in January yet.

So other than casual conversations, we haven't had a really organized, high-level meeting with a bunch of customers to report any trend.

But I think the net of the tax program is going to be that U.S. growth, by people who know it a lot more about these things than I do, is projected to be faster by about 25 to 50 basis points.

So that additional growth is going to translate to obviously more demand for our kind of product.

The second question -- and I don't know what, but I wouldn't be surprised if it's 30 million, 40 million feet of more absorption if the product were there.

I'm not sure the supply is going to respond quickly enough for that product to be there.

But I think it's going to be good for business.

The other question we've gotten is whether the tax act, the new tax act is going to shift more of this demand to the middle of the country because the coasts got hammered on the tax thing because of SALT and all this other stuff.

Look, on the margin, the 25% to 50% extra GDP growth is going to lift all boats.

I'm not smart enough to know whether that's going to lift the boats in the Midwest more than the ones on the coast.

But I think all of those boats are going to be raised.

And there could be that some of the lower tax states and with lower residential cost and lower tax rates will get a disproportionate benefit.

But I think pretty much everywhere will get a benefit as a result of that higher GDP growth.

Next question, from Manny Korchman of Citi.

Manny here.

If we think about sort of shadow supply, maybe using the Sam's Club closures and conversions as an example of that, how much of that type of supply do you think about or worry about coming and disrupting maybe more sort of vanilla construction or development that you guys are doing?

Manny, that's a good question.

And I think that's the problem that certainly has hurt the office sector in the past at inflection points.

We've got a pretty good handle on shadow space because we track utilization on a quarterly basis.

And we've done that pretty consistently for the last 10 years.

So we both have sort of period-to-period comparisons and actually absolute level comparisons.

Right now, utilization is -- continues to be at the highest level it's been, within very few points of the highest level it's been.

So there's not a lot of slack in the system.

And people are not hoarding space the way they were in the first dot-com in the early 2000s, where a lot of people were just leasing twice as much as they needed in the hope of growing into it.

I think people have been pretty disciplined after the global financial crisis.

And then as the vacancy rates went from 14% to 4.5%, 5%, they just don't have the opportunity of doing that.

So we don't think there's a lot of shadow space at all.

Next question is from Craig Mailman of KeyBanc.

Just two quick ones.

I guess, first, on the $1.6 billion of noncore that you guys would still sell over time, kind of what's the growth rate or internal growth rate on that versus the rest of the portfolio?

And then second, just on the development starts, you guys are about $400 million higher on the initial guide here versus where you were last year.

I guess I'm just curious, what's the current visibility on the $2 billion to $2.3 billion at this point?

And just a sense, given I guess the mix of build-to-suit to spec, kind of how should we think about margins?

Okay, Craig, this is Tom.

On your first question regarding the relative return on what we're selling versus what we're -- versus our in-place portfolio, I don't have those numbers readily available.

But clearly, the rent growth that we're seeing in our whole portfolio is substantially greater than the rent growth in the noncore markets that we're selling.

Yes, historically, that number has been about a cap rate differential of about 150 basis points across the cycle and a rental growth benefit of 250 basis points.

So there's been roughly 75 to 100 basis points of free lunch, if you will, by taking a slightly lower yield in the more constrained market and making it up in growth.

I'm not smart enough to know exactly what it is on the mix that we're selling.

Mike, why don't you talk about visibility of this development?

In terms of visibility, it's well over 90%.

I'd say that's as good as it's been since the merger, which gives us our confidence in our forecast here.

And then margins, your question there, you should expect those in the mid- to high-teens.

And those are selling numbers based on this level of activity as well, too.

And Craig, when you look at our share of starts, they're pretty comparable year-over-year.

Yes, maybe that's the confusing number.

I mean, the total development volumes are more like $3 billion and our share is in the low to mid-2s.

$2.1, $2.2.

Next question, from David Harris of Uniplan.

I have a question on protectionism.

Could you give us some comment as to your thoughts on the impact if the United States would walk away from NAFTA?

And secondarily, could you give also some comments on your thoughts if we were to end up with a hard Brexit in Europe next year?

With respect to protectionism, look, there's obviously a lot of protectionism.

But as you know well, we're not so focused on the production side of the supply chain.

We're focused on the consumption side of the supply chain.

So frankly, as long as people in L.A., in New York and all that continue to have to feed and clothe themselves, I don't really don't care whether that inventory is coming from China or Kansas or Mexico.

So we're really focused on where the consumption takes place.

And that's where we've chosen to concentrate our investments.

I think that if your concern is mostly on the production side, which it would have to be because all kinds of interference, whether it's trade interference or tax regimes or whatever can shift that around, I think you're probably better off talking to people focused on those strategies.

I don't know much about that topic.

With respect to Brexit, look, a lot of people got all excited about Brexit when it was first announced as a surprise.

I think our stock in 1 day went down $5, but our occupancies in the U.K. went up and we had significant rental growth.

And I would say the U.K. has slowed a little bit from that torrid pace back in 2016.

But together with Germany, it's probably U.K. and Germany are the 2 best markets we have in Europe.

And I would put them up against any markets anywhere, including the U.S. So we've not really seen any evidence of Brexit having an impact yet.

And when it happens, I don't think it's going to be material either.

Because what happened is that Brexit is scaring away a lot of capital.

And a lot of development that would have occurred, didn't occur.

So the market actually ended up being tighter in the U.K. And I think that will continue.

The next question is from John Guinee of Stifel.

Another thing that came up, Hamid.

My understanding is that Amazon has 30, 35 build-to-suits out there in the market, which is a new prototype, much smaller footprint, maybe 100,000 to 200,000 square feet, but 75 feet, clear height, multiple levels, highly automated elevator systems.

Can you comment on that prototype and how you feel about it?

So I can comment, but I'm going to let Mike comment because I'm not sure what part of our discussions with them are confidential and what parts of them aren't confidential.

So Mike, why don't you talk about that?

Yes, John, there's certainly a lot of buzz about a sizable rollout they have underway.

But just to put some things in perspective, and at any given year, there's a massive amount of RFPs that are suggested.

And those usually play out over a couple years.

This year, yes, a little bit different, some more unique approaches to the buildings.

It's very early days on that, and we're taking a hard look at that, just like we did other buildings we've done with Amazon.

And to the extent they are very unique or we were of the opinion that we think we'd be better served to sell those, we'll certainly look at doing that as well.

So very early in the process, but you can obviously look to Amazon for being an innovator, and we'll keep up with them as well, too.

Yes, the only thing I would add to that, John, is, look, Amazon is pretty much got the same strategy that we do.

They want to be near where the consumers are.

And those markets are -- I should say we have the same strategy as Amazon.

I suppose we went public earlier, so who knows.

But look, it's going to be harder and harder to find large plots of land that support single-story, 800 million square foot type buildings in these urban areas.

So they need to be able to squeeze that much business into a smaller footprint by going vertical.

And even in the 800 million square foot buildings, the mezzanine them at 3 levels, so operating on multiple levels with low clear heights are not anything unusual for them by any stretch.

But I think the key point is what Mike sort of mentioned, any building that we do for Amazon or anybody else, we go through the analysis.

Do we want to own this building in a soft leasing market without Amazon renewing?

And if the answer to that is that the building is fungible and divisible and we can lease it to normal tenants, we keep it.

And if the answer is no or maybe, we will sell those.

And there are plenty of people that want to buy that credit for 15 years.

So there's not a shortage of capital for that kind of thing.

And we have to do that.

Otherwise, they'll end up being a very big portion of our portfolio.

And we kind of want to manage it to a lower number than our potential business opportunity with them.

And our last question is from Manny Korchman of Citi.

It's Michael Bilerman.

Hamid, Prologis has been a leader in sustainability, certainly within the real estate industry, but I would say corporate -- across all corporates.

I guess, how do you sort of react and sort of what's the impact to the new tariff and taxes on solar panels?

How does that impact your desire to get up to 200 megawatts of self-sustaining power?

Is it only impacting the U.S. or the other countries that you're doing it in?

Just things like that.

So Michael, there are so many different proposals coming out of -- in the early morning of every day that we don't really have the time or the ability to react to every single one of them.

We'll continue to have that commitment.

But as I've always said to our people, we don't do this stuff to go to heaven.

We do this stuff because it's good for our customers and we can make money doing it.

Sustainability is a good investment because in the long term, the life cycle cost of operating the building are more favorable to our customers.

And eventually, that translates to rent.

So to the extent that Paris or anything else might change those dynamics on the margin, the economics will change and we'll do less in some areas and more in other areas.

Once there's some specific proposals to react to, I can probably give you a more clear answer.

But we've never been in the business of saying, "Okay, we shall have x megawatts of power on our roof, and therefore we're going to do that, whether or not it pencils or not." It's always been an economic calculation for us.

Michael, I think you were the last question.

So thank you again for your interest in Prologis, and we look forward to seeing all of you soon in the next couple of months.

All the best, take care.

Happy New Year.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.