Prologis Inc (PLD) 2018 Q4 法說會逐字稿

Welcome to the Prologis Q4 Earnings Conference Call.

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

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

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

Tracy, you may begin.

Thanks, Kim, and good morning, everyone.

Welcome to our fourth quarter 2018 conference call.

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

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

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

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

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

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

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

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

Gary Anderson; Chris Caton, Mike Curless, Gene Reilly and Colleen McKeown are also here with us today.

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

Good morning, everyone, and thank you for joining us.

We had a great fourth quarter capping out our strongest year ever, and Tom will go over the details of all that later.

What I want to do right off the bat is to address the issues that are probably top of mind for most of you, namely what we're seeing in the up-to-the-minute data, what we are hearing from our customers and the steps we are taking to manage through this period of increased uncertainty.

First, let me start with what we know.

The proprietary forward-looking operating metrics, which we monitor regularly, such as showings, average deal gestation periods and lease conversion rates are holding steady.

We signed 17 million square feet of leases in December and in the first 20 days of January, usually, the slowest part of the year.

Based on specific data which we can elaborate on in Q&A, customer interest is robust.

We expect activity to remain strong with our most dynamic customers building out new and improved logistic networks.

While we haven't seen any softness, even in the slower-growing segments, we wouldn't be surprised if some users hit the pause button until they saw further clarity on the direction of the economy.

Now for what we think this means.

Our crystal ball is not any clearer than anybody else's, and we're navigating in uncharted waters since the factors causing market volatility are 100% self-inflicted and don't lend themselves to fundamental analysis.

If the government shutdown and the trade disputes with China are resolved soon, the market can very quickly bounce back on its prior strong trajectory.

After all, confidence is the cheapest and strongest form of stimulus.

Now what are we doing about all this?

With the completion of our $14 billion nonstrategic disposition program, our portfolio is now focused on the highest-quality properties in the best markets.

Our balance sheet is one of the strongest among REITs, and our funds have ample investment capacity.

In short, we've already done the hard work of preparing for all parts of the market cycle.

Also, property fundamentals remain the strongest I've ever seen with vacancy at a historic low, utilization at a historic high, limited new supply, absence of shadow space and e-commerce providing a secular tailwind to the logistic sector.

We've taken several additional steps to account for the increased risk of the capital market volatility.

First, we've raised the bar for all new speculative development starts.

Second, we're monitoring our proprietary forward-looking indicators on a daily basis and are actively engaged in customer dialogues to assess any changes in market sentiment.

And third, in the last 2 weeks, we've tempered our 2019 business plan assumptions and guidance to account for higher potential risks in the environment.

Again, I want to emphasize, we are not seeing any signs of weakness in the market but to ignore the turbulence of the past month would be irresponsible.

We're not telegraphing an inflection point in the economy.

We're just trying to be prudent in running our business.

Looking back, this environment reminds me a lot of the dot-com era.

In the 2 years following the market peak in March of 2000, NASDAQ lost 2/3 of its value.

The S&P 500 was [off] 20%, while REITs appreciated by nearly 60%.

We're not naive enough to think that we can predict the market, but there are uncanny parallels between the environment today and that.

Sure, today's generation of tech leaders are real companies making real money, but there are plenty of unicorns that are highly dependent on the abundance of cheap capital -- risk capital for their survival.

History doesn't repeat itself, but it does often rhyme with the past.

My bet is that well-managed REITs will shine once again because of their defensive characteristics and attractive risk-adjusted yields.

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

Thanks, Hamid.

I'll cover highlights for the fourth quarter and introduce 2019 guidance.

We had an outstanding year and quarter.

Core FFO per share was $3.03 for the year, which included $0.14 of net promote income and $0.80 for the quarter, including $0.05 of promotes.

Global occupancy at year-end held steady at 97.5%, while the U.S. ticked down 20 basis points as we continued to push rates and term.

Our share of net effective rent change on rollovers in the quarter was an all-time high at 25.6% with the U.S. at over 33%.

We leased 35 million square feet in the quarter with an average term of 83 months, also a record high.

The spread between our in-place leases and market rents has expanded modestly to more than 15% driven primarily by Europe, where we now estimate our leases to be approximately 11% below market.

Our share cash same-store NOI growth was 4.5% for the quarter.

Given the longer lease terms this quarter, we had more nominal free rent which had a 50-basis-points drag on cash same store.

It's important to note that free rent as a percentage of lease value declined sequentially by 20 basis points to 3.7%.

2018 was also a good year for our strategic capital business.

Investor demand remained strong for well-located logistics real estate.

We raised $2.2 billion in new capital and grew our third-party AUM to more than $35 billion.

Our strategic capital business continues to deliver a global revenue stream with over 90% of fees coming from perpetual or very long-life vehicles.

On the deployment front, we had an active year and created significant value for our shareholders.

Development stabilizations were approximately $1.9 billion with an estimated margin of over 35% and value creation of $661 million.

The $1.1 billion of asset sales in the quarter marks the completion of our multiyear nonstrategic disposition program.

Turning to capital markets.

Our balance sheet remains one of the best in the business.

Our credit metrics are extremely strong, and we continue to access capital globally at attractive terms.

We had minimal refinancing risk as more than 75% of our debt is denominated in foreign currencies where base rates are near or at historic lows.

And with the recast and upsize of our global line of credit, we now have liquidity of over $4 billion and more than $6.5 billion from potential fund rebalancing.

We can self-fund our run rate deployment for the foreseeable future.

Now for 2019 guidance, which I'll provide on our share basis.

As Hamid mentioned, unless resolved soon, the volatility in the capital markets and the related self-inflicted political paralysis are bound to affect consumer and business confidence.

We revised our outlook and corresponding guidance in response to this ongoing uncertainty.

Clearly, there is upside to our guidance should these issues be resolved.

We expect cash same-store NOI growth between 3.75% and 4.75% and period-ending occupancy to range between 96% and 97.5%.

For strategic capital, we expect revenue, excluding promotes, of $300 million to $310 million and net promote income of $0.10 per share, which is based on today's real estate values and FX rates.

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

We expect to recognize majority of the promote revenue in the third quarter and incur $0.01 of promote expense in each quarter of 2019.

We have reduced development starts from 2018 levels and expect to range between $1.6 billion and $2 billion.

Build-to-suits will comprise more than 30% of this volume.

Dispositions will range between $500 million and $800 million, well below our $2 billion run rate over the last several years.

Contributions are expected to range between $1 billion and $1.3 billion, which includes the formation of our Brazil venture that closed last week.

Our share of net deployment uses at the midpoint at $400 million, which we plan to fund through a combination of free cash flow, modest leverage and potential fund sell-downs.

There is a timing lag to reinvest our significant deployment proceeds back into development, which will reduce first quarter core FFO by approximately $0.02.

For net G&A, we're forecasting a range between $240 million and $250 million, representing year-over-year growth of 2.5% at the midpoint while managing 18% more real estate.

Putting this all together, we expect 2019 core FFO to range between $3.12 and $3.20 per share, which includes $0.10 of net promote income.

Our guidance reflects the impact of the new lease accounting standard.

For year-over-year comparison, our 2018 results reflected $0.04 of internal capitalized leasing costs.

At the midpoint, core FFO growth, excluding promotes, is all up 7.5%.

To put this growth into context, the 3-year plan we've provided at our Investor Day in November 2016 called for 7% to 8% annual growth, excluding promotes.

At the midpoint of our 2019 guidance, we'll have averaged 8.7% for this 3-year period, outpacing our high-reach expectations.

To wrap up, we had an excellent quarter and year.

While we remain on the lookout for signs of market weakness, we feel great about our business and are extremely confident in our ability to outperform.

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

(Operator Instructions) Your first question comes from Ki Bin Kim from SunTrust.

Hamid, thanks for the opening remarks.

But if any slowdown should occur, where should we expect that first?

Is there a geographic tilt to that?

Or is it the amount of space tenants looking for the rent or type of tenants?

Any kind of color on that?

Yes.

I think it's likely to be a demand-driven problem because any change in situation is not likely to come from the supply side.

There's a lot of visibility on supply for the next 12 years -- 12 months, so it's really the demand side.

So you would -- where you would see it is obviously on leasing volumes and rent change on leasing and the like, probably not in same store because that takes a while, and it's very occupancy driven.

And you know we're trying to drive down occupancy, so you'd see the rent change and leasing volumes and all that.

Where we would see it a bit earlier than new are some of those forward-looking indicators like traffic to our buildings, like how long it takes to make a deal, like what is the conversion rate of showings to actual leasing activity and all that.

So we see those on a daily basis.

Literally, I can tell you what happens at the end of today.

And those are the forward indicators that I was referring to.

Your next question comes from Michael Bilerman from Citi.

I'm here with Manny Korchman as well.

Hamid, I was wondering if you can spend a little bit of time talking about development starts.

And I think one of the comments you talked about is trying to be conservative in managing -- the land banking managing starts.

As we think about 2018, you've put out a range with a midpoint of $1.8 billion in terms of starts, which was down about 30% from the $2.5 billion you did this year and certainly lower than the guidance you came into as well into 2018.

So how much of that is a demand side versus a yield to expectation side that's dropping that you don't want to play in?

And maybe you can sort of talk about those.

Or how much of it is just purely the land bank to support a larger pipeline?

Maybe you can sort of help put that into context.

Sure.

First of all, if you look at our development guidance, there's build-to-suit and there's spec.

And on the build-to-suit front, we have assumed a small falloff rate, but essentially the build-to-suit activity that we have and we know we have great visibility on.

On the specs, we've reduced the starts by maybe 40%-ish, maybe 45%, only because why get off in front of our skis?

Last year was the biggest development start number that we had in a decade.

I remember way back when, when people kept always looking for higher and higher development guidance, and I mentioned 3 or 4 years ago, maybe 5 years ago now that our development is going to raise between $2 billion and $3 billion a year.

Last year, we exceeded that.

This is gross numbers, not our share.

Our share numbers are smaller.

But at this point in the cycle, why project more spec development than you have visibility for?

So as you know, we're building mostly in parks, and we're building off in the sixth or seventh building in the park.

We usually have a couple of pads ready to go.

So if we're wrong about market demand and strength of the market, we'll just -- we'll continue to at the higher level of spec development.

We totally control that, so there's no point counting on that and getting expectations to that level.

It's certainly not because of lack of land bank because, while we've pruned our land bank significantly, our land is really good and developable and in title.

And it is certainly not because we're not getting the yields.

I mean, you've seen us now for 5 years project yields in the teens, and we end up in the 20s and 30s.

So the land bank provides for almost $11 billion of build-out, if we were to build all of it.

So we got capacity for many years of development and feel good about that and are not going to be afraid to put that capacity to good use in terms of additional starts as we watch the year unfold.

Your next question comes from Jamie Feldman from Bank of America.

Great.

I was hoping you could just provide a little bit more color on the changes you did make to guidance.

It sounds like in the last couple of few weeks, you revised lower.

Can you talk about where you did make the cuts?

And then also kind of how conservative is this number?

I mean, what would it take to actually -- how much worse would things have to get for you to actually miss what you put out?

Well, the second part of that or the last part of that is really hard to answer.

Obviously, if the world falls off the cliff, then there's always downside in that scenario.

But there's certainly less downside in this scenario than it would have been in our original plan.

I would say we tweaked our plan in a couple of general areas, and Tom can get into the specifics.

But we moderated rental growth this year.

We -- our glide path to stabilize occupancy of 95%, which is the norm in our business, we got there.

We accelerated the glide path down to that.

We cranked up our credit loss a little bit, and we obviously reduced the development guidance or development expectations for the year going forward.

Those are the big parts of it.

Tom, do you want to...

Yes.

So on rent growth, we tempered that by about 200 basis points.

So global, our share rent growth in '19 will be in the mid-3s.

Same-store NOI, we talked about.

That's down about 50 basis points driven by lower average occupancies, lower market rent growth and a little bit of bad debt.

We did mention starts, we've talked about.

Core FFO, down about $0.05, a combination of about $0.02 from same store and NOI, about $0.02 from lower deployment and a slower pace of deployment and about $0.01 from lower fees just related to lower transaction volume.

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

Okay.

In terms of the guidance for occupancy declining this year, would you break down the drivers of that impact between, on the one hand, your strategy of pushing rents more at the expense of occupancy versus whether there is a bigger impact from supply-demand imbalance or even some of your conservatism on demand because of the weaker economy?

Yes.

There is no supply-demand imbalance.

I mean, even last year, in 2018, much to our surprise, demand exceeded supply.

Now we've been sitting here telling you for 4, 5 years that one of these days, the supply will exceed demand by a little bit, and we're going to say that again this year.

We've been wrong in the last 4 or 5 years.

But even if demand falls short of supply, with an effective vacancy rate in the markets of a high 4% range, even a 50 million square foot shortfall between supply and demand won't move vacancy rates by more than 10 or 15 basis points.

So I don't think it's those kinds of things.

It's just that we are trying to maintain pricing power and push rents.

Frankly, as the market has spoken, our occupancy levels have not budged, in fact moved in the wrong direction.

It is our stated objective not to be running so full, particularly when you look at the underlying utilization of these buildings.

It's not only that vacancy rates are low.

It's also utilizations are really high.

So every indication we have is our customers need more space, and they're really tight.

So -- but we do want to drive pricing.

So you might critique us by saying, "Why do you reduce your rent growth forecast if you're pushing for more rent and reducing occupancy levels?" And my answer to that would be we're trying to be prudent in this environment.

Things move around quite a bit.

And if we turn out to be overly prudent during the year, we always have the opportunity to adjust that in subsequent quarters when we talk to you.

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

I wanted to get into the mix between development yields and the weaker global growth environment that has you guys prudent.

And when I look at the 6.2% fourth quarter development yields, certainly a bit lower than full year '18 at the 6.5% level.

So was this the new norm for 2019, the lower yield environment?

And is it due to construction costs?

Can you share some of this cost impact on new development and how those pressures break down, I guess, between labor and materials?

So I wouldn't read too much into the lower yields.

It's partly mix, and it's partly, obviously, we moderated our rental growth.

So whatever we have in the mix before is going to be a little bit lower because that moderated rental growth, but it's still very profitable development.

And as you can see, we keep guiding to build-to-suit margins in the 12% range and spec margins in the 15% range.

And we, every year, have come out ahead of that 500 to 1,000 basis points of margin, maybe some more in prior years.

So look, I don't know what it's going to be.

We're going to find out what it is, but we're taking our best guess at it, and we feel pretty good about there being profitable, ample, profitable development opportunities.

Again, as I said in response to the previous question on development, it's not like we're reducing our guidance because we don't think we can get the margins.

If the market holds up anywhere near where it has been, I think we'll get really good margins.

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

Hamid, you had mentioned in your opening remarks that you kind of raised the bar from your speculative starts.

Can you maybe just give a little bit more detail on where you tweaked it from maybe yield expectations?

And then just a follow-up, Tom, maybe to Jamie's question, could you just -- I think I heard 50 basis points.

But could you just clarify kind of where cash same-store was before you guys kind of took a haircut to it?

Tom, go ahead and mention that.

So, Craig, yes, 50 basis points lower same store based on our assessment of the market volatility versus our original plan, 50 basis points lower.

Yes.

And I thought I answered the first part of the question.

But if you want to ask it a different way, maybe I can see the nuance in it.

I was just -- I apologize if I didn't hear you.

I just wanted to get a sense of where -- what exactly you're tweaking it for.

Is it a yield bar that you're kind of raising here on new starts?

Or is it just...

No, no.

What we said is we sat around the table and we said, "Okay.

Let's see what happens to our build-to-suit volume.

Let's whack that by 15%.

Let's say what can happen to our spec volume, and let's whack that by 45%." And we massaged those numbers around, and that's where we came out so was not -- I mean, it was not a bottoms-up deal-by-deal buildup of the spec starts.

It was that way for the build-to-suits.

But by definition, the spec starts are not the bottoms-up exercise.

Your next question comes from Vikram Malhotra from Morgan Stanley.

I just want to focus on the rent growth comments.

I know you've just sort of tempered expectations sort of more -- just to be conservative.

But can you give us some color on what you're baking in for sort of coastal maybe versus other markets?

In the past, you've talked about high single digits in coastal and made another.

And then are there a couple of markets you can call out where you're maybe seeing some turn in fundamentals that's driving this, any market specific?

The short answer to the question is that coastal is more like 4%, 4% plus, and inland is more like 2%, 2% plus.

But there's a lot of variability and even in those numbers, and we have a very detailed market-by-market analysis of rent.

We forecast rents market by market, and we update our forecast a couple of times a year.

Your next question comes from Jeremy Metz from BMO Capital Markets.

Two questions for me.

The first is want to go back to the supply conversation.

Just given some of the rising costs and just the overall limited amount of quality infill land sites that are out there, I'm wondering if you can comment on how much of new supply being built today is really just not competitive or a threat to your U.S. portfolio, just given all the repositioning you've done at this point?

And then second one is one for Tom, just on guidance.

You have the DCT portfolio under 13 months now.

I think originally, you're expecting about $0.07 of accretion in 2019 from that.

Can you just talk how this -- how it's trending?

And do you still feel like that's the appropriate amount?

Jeremy, I'll go first on that.

The accretion in '19 is more like $0.05 because in 2018, we had $0.07 annualized.

So we got $0.02 plus of that in 2018.

So the real incremental increase in '19 is $0.05.

But all our expectations, as we said, we hit all of our day 1 synergies way back in Q3.

Everything is going, I would say, overall, better than planned.

Yes.

And with respect to the markets, I would say there are some markets that are -- have had too much supply in the last couple of months.

And I would say Chicago, starts have really picked up in Chicago, so we're watching that pretty carefully.

Atlanta and Houston and Central PA, those would be the markets where we would have a concern about supply.

And if you want to expand that list internationally, I would say I would add Madrid and Osaka to the list.

And on the positive side, we feel better about Dallas than we did a couple of months ago.

Seems like we're over the hump over there.

So these numbers will move around, but you'd probably see them more naturally in the less supply-constrained markets.

Your next question comes from Michael Carroll from RBC Capital Markets.

Yes.

Tom, can you provide some color on what your bad debt assumptions are for 2019?

And are you seeing any specific tenants that you're concerned with in the portfolio?

I know last quarter, I think you highlighted there is roughly 30 basis points of revenue that you would say that, that risk.

Or is it more just the uncertain macro conditions and that's why you increased those assumptions a little bit?

It's really -- it's the latter.

If you look at where bad debts have been trending over the last several years, they've really been at historic lows, around 20 basis points of revenue historically.

We see that number more like 50 basis points over long periods of time.

We feel really good about our credit quality.

I think our exposure to controlled tenants is quite small, extremely small, I would say.

But yes.

And this -- from how we approach our budgeting, we have assumed that bad debt expenses rise towards, not all the way, to historic norms.

So they're coming off the bottom, rising towards historic norms.

But again, we -- I feel great about our credit quality.

I feel great about our exposure.

This is just in the spirit of being prudent, as Hamid mentioned.

And your next question comes from Tom Catherwood from BTIG.

Excellent.

Sticking with development here.

Your guidance for 2019, it looks like stabilizations are going to outpace new starts by roughly $250 million, which makes sense considering you did $1.4 billion of starts in the fourth quarter.

But if we look at 2017 and 2018 combined, the starts outpaced stabilizations by nearly $900 million.

So all else being equal, I would kind of assume the amount of stabilizations would be even greater in 2019 than what we're looking at.

Are the new developments that you're starting taking longer to construct or stabilize or are other factors that account for this kind of lag in the stabilization?

Tom -- I'll go first.

This is Tom Olinger.

Two things.

I think when you look at '17 and '18, particularly '18, we had a lot starts in the back half year, particularly Q4.

And then I throw a little bit of mix in there.

But from a stabilization standpoint, we are stabilizing assets generally, I would say across the board consistently ahead of underwriting, number one.

And number two is I think you're going to see a lot of stabilization NOI come in 2020 is going to be one that really unwinds.

And when you think about -- particularly overseas where we're building multistory, it does takes longer to build, so that has to be factored.

That's part of the mix component.

But we're leasing up.

You could see it in our development pipeline.

We're leasing up at good rates or at a good pace, I would say, ahead of where we thought we'd be.

Rents are higher than we thought they would be.

Margins are higher than we underwrote, so I feel really good about all that.

So the only thing I would add is just put an underline on something Tom said which I think is generally misunderstood.

2020 is a huge year for incremental return out of development stabilizations.

That volume, we've already paid for.

And the only -- unless we've gotten to our income statement is through capitalized interest, which is a very low number.

And when those deals convert to sort of the 6%-plus yield, given the volume, it doesn't take a lot of math to figure out that 2020 is going to be a really, really good year in terms of growth coming from the lease-up of the development pipeline.

But we're not going to guide to 2020, so don't even go there.

Your next question comes from Jon Petersen from Jefferies.

Great.

So just looking through your operating metrics in your supplemental, leasing terms this quarter was about 83 months.

It's been pretty consistently around 50 months for the past 4 quarters or probably longer than that.

So is that -- is it a mix?

Is it Prologis pushing for longer lease terms?

Are the customers wanting longer lease terms?

And do these contracts look any different, I guess in terms of free rent or escalators?

Anything to read into there.

Yes.

Jon, this is Gene.

I'll take that one.

There is a bit of mix because the development lease terms are actually 148 months during the quarter, but the operating portfolio was 71.

So that's increasing but not at the -- quite the pace that you see with 83.

And I'd also warn everybody, this is volatile quarter-to-quarter.

We have been pushing term really hard.

It is good to see it going in the right direction.

You're probably not going to see an 83 next quarter, but some of the debt trailing average should be trending up.

Your next question comes from Eric Frankel from Green Street Advisors.

Just a quick question on the fund management business.

Maybe you guys can just give a sense of what the investor outlook is like for logistics at this point in terms of how much you could grow your AUM if you wanted to and whether you have the appetite to do so?

And then if the trade war with China really does escalate and we put tariffs on all their imported goods, do you have a sense of what geographic markets in the U.S. will get impacted the most by that?

So let me take a stab at the second one.

I think if you'll think about most of our U.S. markets, the vast majority of demand comes from consumption of the population in those markets.

Now there are a couple of markets like L.A. and New Jersey where you have an incremental flow-through coming from imports, so those would slow more than the ones that are just consumption markets because the location of where goods are coming from will change on the margin.

But those things take actually a lot longer than most people think, and the currency effect is usually also mitigating some of the tariffs.

So -- but you would think it would be those markets on the coast by a little bit.

Chicago is an inland court, so I would throw that one in there, too.

So -- what was the first part of your question, Eric?

Fund management.

Fund management is very strong.

Our queues could be a lot longer if we weren't concerned about the amount of time that it would take for investors to get their capital invested.

There's no sense of kind of raising a lot more money if we can't invest it.

So the sector seems to be defying gravity in terms of investor demand, pretty much everywhere.

Your next question comes from Dave Rodgers from Baird.

Yes.

Tom, I wanted to follow up on the 3.5% market rent growth.

Can you give that by Asia, Europe and the U.S., just kind of broad stroke and what you're expecting for '19?

And then maybe Hamid or Gary, weigh in on where rent growth has been in Europe, cap rate trends, just over the last couple of months with some of the uncertainty and what you might be seeing post the Brexit vote and the China slowdown.

At this point, we won't break out the different components of -- global, our share is in the mid-3s, as I said.

And that's down about 200 basis points from our original expectations, though.

Yes.

And with respect to market rent growth, I mean, Europe has been sort of in the 5% range, plus or minus, and we do expect it to be greater than the U.S. in 2019.

We have tempered our view slightly with respect to next year, downward, in terms of market rent growth but still sort of in the mid-4s.

Is there another part to that question?

No.

I think you got it.

Your next question comes from John Guinee from Stifel.

Great.

You guys are making it look easy, aren't you?

Your office brethren right now is suffering from a really difficult cost of capital.

You guys don't seem to have that problem.

But when you're looking at your cost of capital, how are you in the analyzing your open-end fund business versus your common stock price?

And at what point in time does it make sense to really push the fund business versus common equity?

Or do you just not even look at it that way?

First of all, with respect to common equity, I think we are truly the only company in the sector that hasn't raised any equity.

I mean, you could call issuing equity to buy DCT an equity raise, but we haven't actually raised equity, and I mean ATM or anything like that.

So our view is that we have a self-funding model, and we're very committed to that.

And as we've shown you, we are overinvested in most of our funds.

So there -- and there's ample demand for people who want to expand their position into our fund.

So we've got something like 10 years of capital from those sources based on our normal run rate, not M&A, but just on normal rate.

So our philosophy is pretty simple on raising public equity, which is that we're not going to and we don't have a need to anytime soon.

So with respect to our private capital business, this is really important.

And I'm going to say it again, John.

You and I have known each other for a long time.

We don't look at that as a different business.

It is our business.

It's playing out.

Our capital is invested in that.

So it's not like we do the lower-yield deals in our public -- in our private capital vehicles and our good deals in our balance sheet.

We do all deals in our vehicles that are invested in that locality, so we treat all businesses the same.

I think cost of capital today, the way I think about it is probably in the mid- to high 6s, approaching 7%, total cost of capital.

And I think in an environment where inflation is generally around 2% and leverage is around 25%, 30%, that's an appropriate risk-adjusted return given the volatility of the asset class.

And I don't see that much of a difference between the public sector and the private sector because, generally, in our sector, they seem to be trading in line with one another.

I think that private side is probably a little bit more richly valued than the public side, but they're reasonably within 5% of one another.

So I know that, that difference is much wider in other sectors, but part of that may have to do with the growth expectation of the different sectors.

We go around capping everything, but we're not very good at capturing different growth rates.

So I think if you look at it on an IRR basis, they're going to be very similar between different sectors.

Your next question comes from Michael Bilerman from Citi.

Hamid, it definitely sounds there's certainly a built-in prudence to how you've gone about forecasting for this year given a lot of the macro uncertainty.

A lot of the data and the stats support robustness, and I think you talked about in your opening comments how your discussions with tenants have indicated continued robust demand.

So I'm wondering if you can sort of draw a parallel to what your tenants are telling you relative to the conservativeness or the prudentness that you're taking in your forward expectations and maybe a mismatch that could be there.

Look, at the end of the day, I don't think our customers really know that much more than we do.

Everybody's guessing as to what the implications of this last 50 days of weirdness are going to be.

So I think basically what we're hearing from our customers is that they were going pretty much with very strong business plans through the end of the year.

Their companies probably haven't had their earnings call yet, so we'll see what they say at those calls.

But as far as the real estate department and procuring capacity is concerned, they haven't gotten the memo that division is slowing.

They may in a couple of months, but they haven't gotten it yet.

And your next question comes from Jamie Feldman from Bank of America.

I want to get your thoughts on some of the consolidation we're seeing in this 3PL industry.

Just kind of how do you think -- if we continue to see this, how do you think this impacts tenant demand and your business over time?

I think it's good to have more profitable, more consolidated larger customers.

It is an extremely fragmented business.

We don't think the level of concentration, if it even continued for a long time, is really going to change the dynamic, the landlord-tenant dynamic because it's still going to be a very fragmented business.

But I rather have -- look, the boxes have to move from point a to b. The consolidation doesn't do anything about how much the boxes need to move.

It's just that it's more profitable on moving those boxes around and to have better capitalized profitable customers.

We prefer that.

So I think some pricing discipline coming into that business in terms of how they price their services is all good.

And your next question comes from Sumit Sharma from Berenberg Capital.

Quick question on your utilization.

So your last BI report says it's around 87%, 86.5%.

I'm assuming it's pretty much the same based on your comments.

I was kind of wondering whether the -- you could comment on the range of that distribution and if the median has shifted higher or lower year-over-year, just trying to get a sense of the [SKU-ness]?

So that's above my pay grade, and Chris Caton will answer that.

Yes.

Sumit, thanks for the question.

As you've seen in the report, historical utilization rate can range between 82% and 87%.

And we're right bang-on at the peak of that over the last 12 months.

So utilization is running at peak levels.

Your next question comes from Eric Frankel from Green Street Advisors.

Just a quick follow-up.

Hamid, I know we talked about, maybe a few quarters ago, just one of the trade wars talks really started to accelerate, just kind of how stuck companies were in their supply chain.

Has there been any talk of anything different in terms of changing their manufacturing or origination in terms of how their goods are moving?

Not that I can tell and certainly not that's supported by the data because notwithstanding all this talk, I think deficit from China was at record levels last time it was reported.

I don't know if that's because of the lag between the talk and the action or anticipation of people doing more volume prior to any tariffs taking place.

I don't know.

But we haven't seen any evidence on that.

I think the macro point I can make is that, generally, people are shifting more productions in Mexico in terms of manufacturing, but we were having the same exact conversation about Mexico 1.5 years ago.

So these things can move around faster than people can react to.

Your next question comes from Blaine Heck from Wells Fargo.

Just want to get a little commentary on asset pricing here.

It seems as though we've seen cap rates holding steady or even continuing to decrease in the infill and coastal markets.

But I'm wondering if you're seeing any markets out there, especially in the U.S., where maybe there's been an inflection and you're seeing cap rates increase at all.

I've got to tell you, though, in the last couple of transactions that we've pursued of scale, we have been blown away.

We literally have been blown away by other interest in those portfolios.

And if those deals close, that bodes very well for NAV.

So let's leave it at that.

Your next question comes from Jason Green from Evercore.

Just wanted to ask quickly on institutional capital demand in Brazil given the recent JV that you guys announced and the election that happened about a month ago or a few months ago at this point.

So this is Gene.

If you're talking about sort of general institutional demand, we may not be the best people to ask, but it is a business environment that has a lot of optimism right now.

The new president is certainly business friendly, and we've certainly seen a lot more demand from customer activity down there.

And obviously, we did recently sign a very good JV.

So -- but as far as broadly speaking, my guess is that there is more institutional demand at this point given the political changes.

Being that, that was the last question, let me just add one more comment that I found the most interesting.

Probably the most interesting statistic that I've seen about the economy is something called the global economic policy uncertainty index that I actually saw in [AXIUS] a couple of weeks ago.

And it's a scale -- we're spending more time trying to understand it, but it's a scale of the degree of policy uncertainty around the world.

And let me give you a couple of points.

During the 9/11 attack and the Iraq war breaking out, that index was at 200.

At the peak of the global financial crisis, it was at 210.

And Brexit, it got to 300.

And today, given the China war and the government shutdown and all that, it's well north of 300.

Now I have no idea whether there is any academic rigor or anything related to this index, but I just found it fascinating that the world thinks we're in a much less certain environment.

That uncertainty is usually viewed as bad.

It can be bad or good because we saw how quickly the Mexico stuff turned around.

But the reason that we've taken the position that we have this quarter is exactly because we're living in this kind of world.

And as I said before, don't read too much into this.

We need to stay tuned, be vigilant, really keep a sharp eye on what customers are saying and doing, and I think we'll have a business that's just fine.

Thank you for your interest and look forward to talking to all of you soon.

This concludes today's conference call.

You may now disconnect.