Prologis, Inc. (PLD) Earnings Call Transcript & Summary

External growth, yes.

Well, I think -- just one overall comment would be when we decide to grow, whether it's putting capital to our development portfolio or acquiring an asset, it has to enhance our growth. Number one, it's got to be an asset that's in the markets we want, and it's got to be at the right asset quality that -- and then more importantly, drive the right long-term growth for us. If it were not, it would be this silly and stupid for us to go out and acquire assets that dilute our long-term growth. So it's all about driving long-term growth opportunities. And from an acquisition standpoint, things are certainly more competitive today. Cap rates -- prices are going up, cap rates are going down. And we look to acquire where we can add value, with something unique that we can bring to the table, whether it's a customer relationship, whether it's utilizing our in-house environmental or construction teams, it's solving our customer problem. So that's where we try to focus, where we can drive incremental value for our shareholders long term. And as far as larger acquisition opportunities, it's always a function of what's available on the market. And it's -- again, it's got to be -- at the asset quality, what we want at a price that makes sense for us from a growth perspective. And we focus on unlevered IRRs, that's what drives our investment strategy. And then second would be if you're buying a large portfolio and there's portions of it you don't want, you got to be able to price that portfolio to move it, cover transaction costs and cover holding costs. And -- so we're certainly prepared to do that. We've got the systems, processes and technology to further scale significantly. I'm confident in that. We certainly got the capital to do it when we look at our current leverage and our rating, both in our -- in the Prologis, the parent company as well as our open-ended funds. We have about $13 billion -- over $13 billion of just leverage capacity. So should something opportunity come our way, we are ready to go if it meets the quality and growth boxes.

That makes sense. So the other kind of growth prospects you've talked about at the Investor Day was related to becoming a lot more customer-centric and really integrating and offering services and products to your customers, be it kind of labor or anything to do within the box itself. Can you talk about where we are with realizing that revenue opportunity? How do we think about it from a materiality standpoint as well as a timing perspective?

Yes, there -- thanks for bringing that up. There are 2 aspects of creating value beyond the real estate. One would be around procurement, using our size and scale to procure goods on our behalf. And we are -- we had set out a target of $150 million of savings, whether that's construction, CapEx, G&A. And we're going to get close to hitting that in 2020, and we will exceed that is my guess in 2021. That's gone extremely well, probably a little faster than we would have thought, and I think there's more upside there as we size it. I think there's more opportunity for us there. And that's already showing up. You don't see it running through the P&L for the most part. Yes, you see some of it in G&A, but the vast majority of it is sitting in development in CapEx. So it's either higher development margins because we are building things more effectively and cheaper. It's lower CapEx, so it's showing up in higher AFFO and higher free cash flow. The other side of that is what we call our essentials business, where we can offer products and services that are centered around when someone's centered or close proximity to the real estate, so when someone's moving into our spaces, what do they need, they need racking systems, automation equipment, forklifts. They need just general services around maintenance of the facility and the like. So we've made progress this year, although slower than what we would have liked. That's a situation where COVID did get in the way a little bit, quite frankly, because a lot of the initial targeting for the customer base was to go out and meet people face-to-face, shake hands because the procure -- the individuals inside the -- our customers buying these types of products and services were different from the real estate. So we had to create new relationships. And that's been a little tougher in COVID. However, we've doubled down on our digitization efforts inside the company as far as our investments in digitizing the customer experience. And through doing that, it's been a good reset of our service offerings and how we deliver services, and quite frankly, opening up another basket of goods and services that we think we can deliver to our customers. And at the end of the day, we feel more comfortable today around the opportunity set here than we did when we talked about this last November. And our scale advantage is significant. We've almost got 1 billion square feet today, but more importantly, about 2.5% of the world's GDP runs through our warehouses. That just gives us incredible scale and buying power. And we're starting to leverage that. Our biggest success for -- so far has been with LED lights, putting LED lights inside of our buildings for our customers and charging for it. We've taken the cost down significantly for LED lightings, almost cost down by 2/3. By -- now we white-label it instead of buying it. We're getting it manufacturing on our behalf. So that's been a huge success.

That's really interesting and definitely additive to the growth story over here. Maybe just taking a higher level view. Can you talk about changes we might see more broadly with the supply chain, be it labor, transportation? We talked about drone delivery. And as you see more automation, what does this mean for the box itself, pound-for-pound? Will we need less space or more space going forward?

I think if you -- so clearly, technology and automation is going to make the supply chain more efficient, which is what's happened really over time. I mean if you look at inventory to sales and -- inventory sales is unusually low right now. But certainly, over time, the supply chain has gotten more efficient, and I think technology will continue to make it more efficient. And clearly, with automation, I think it's just primarily densification, getting more inside the warehouse. And then artificial intelligence around the ability to better predict buying patterns. So knowing what you might want to buy and holding that in inventory. And technology around limiting returns with using augmented reality and virtual reality and the like to try to limit returns. So I think all of those are going to go on. However, as we look at what's happening on the supply chain side with carrying more inventory of the incremental product variety that customers now expect online, so i.e., carrying more SKUs, we see all of those things, in combination, more than offsetting what we would see as opportunities for the supply chain to become more efficient. Now I'll just throw one thing out there. On the SKUs, and I think these numbers are directionally correct, but if you went to a Walmart Superstore, you might see 150,000 to 200,000 SKUs inside that store. If you went to walmart.com, you're going to see 2 million, 3 million-plus SKUs. So just think about the product variety. When you look for something online and the variety and sizes, shapes and colors you can get versus in a store front, we think that's only going to continue to proliferate.

Okay. That makes sense. I want to work in a question that we just got via the web. So during the pandemic, there were lots of customers fulfilling from their own brick-and-mortar stores. How do you see sort of the use of retail stores, or more specifically, malls and strip centers playing a part in the distribution business?

Maybe I'll take those in 2 parts. First, as far as what we're seeing from order online and pick-up in store, we are seeing that create more demand for our type of product. Because what's happening with the order -- buy online, pick up in store, it's creating higher turns and inventory at the store, right? They're just -- the shelves are turning faster, and they need faster turns of the product. So we're seeing opportunities for our real estate to step in and provide inventory for faster replenishment. So a retailer that might have had a -- has a warehouse system that might be 1 or 2 truck days away from the storefront. Now they need something that's inside of a day, so they need something much more infill to restock that store. So that's something that is actually accelerating a fair bit. Now as it relates to retail and strip centers and do those -- I think the real question is, do those become some form of logistics somehow? I do think more of the BOPUS, buy online and pick up in our near store, is going to happen. Now that is not necessarily the most efficient use of space because you're holding inventory in the store, and that's typically your most expensive real estate. So I think over time -- while that's going to increase, I think over time, we're going to see our customer set try to optimize that and shift as much of that as they can to the warehouse because that is the cheaper option. Now there is the whole discussion about is it cheaper to store in the storefront and have a customer pick it up or ultimately store in the warehouse and ship it to their house. And I think that gap is closing, and so I think more of that's going to shift into the warehouse. And then as far as conversions of retail and strip centers into logistics, we did a research piece on that. And the bottom line is we just don't think there's a lot of it in our markets that will be supplied down the road. We think it might be 1% of total supply over the next -- per year for the next 10 years. So it's quite de minimis.

And then I know we have a few minutes left, but just another question that comes up. Comparing globally just different regions, fundamentally, you've -- in the past talked about sort of Europe lagging the U.S. Can you kind of -- as you see it today, can you talk about some of the major hubs, Europe, Asia, the U.S. and maybe even Latin America, just where are we -- all these regions? And from a cycle perspective, where do you see the most growth prospects?

It's interesting. I think there's more consistency across our geographic portfolio as far as opportunities for growth in these infill markets. The trends around e-commerce and carrying inventory are extremely consistent across our customer base and across geographies. So I see those opportunities to be consistent. That being said, I think if you look very long term, the supply chain is most mature in the U.S. and less mature outside the U.S. So over time, I think there's going to be more opportunities outside the U.S. That's not to diminish at all what the opportunity inside the U.S. is. There's meaningful supply reconfiguration that just has to happen for all the reasons we've talked about. But I think it's a very consistent deployment opportunities across the globe and a lot of consistency in the trends, more so than I've seen in my 15 years with the company. So I feel good about opportunities really across our portfolio to both deploy and grow.

Well, great. I think we've almost run out of time. I know people generally have back-to-back meetings. So this was very helpful and informative. Thank you again so much for joining, and thank you, everyone, for listening in. Thanks, everyone . Have a good rest of the conference.

Thanks, Vikram. Thanks, everybody.

Thanks. Take care.