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

Hello. Good morning, everyone. This is Mike Mueller from JPMorgan. And I'm thrilled to be hosting the Prologis panel. With us live today, we have Tom Olinger, CFO of the company. It looks like Tracy Ward from IR is on as well. I'm going to turn this over to Tom for some intro comments. Please feel free to chime up with any questions, and we'll take care of them for you. Tom? You're muted.

How about now? Sorry about that.

Yes.

Excellent. Good morning. Good afternoon. Good to see you, be with you all. Thanks for your time today. I just thought I'd mention a couple of things before we got into your questions. I think there's 4 things I'd like to emphasize. The first would be demand continues to be quite durable. If we look at proposal activities, lease signings, we're seeing continued strong activity coming out of Q1, which was exceptionally strong. We're also seeing supply is very balanced. And we're even seeing some pockets of acute shortages of space in certain very infill high-barrier markets. And customers and investors are competing for space. We're seeing a lot of competition for space, just given the scarcity of well-located assets that can help meet the time constraints of the supply chain. That's really critical to see what's going on. And then just our differentiated strategy with our scale and what our scale provides starting with -- from the customer perspective, our ability to serve customers across many markets is becoming even more critical as the supply chain is a critical element for our customers. So the ability to serve them in multiple markets is a real advantage. Our ability to solve problems for them as a result is a real advantage, just given our footprint. We're almost at 1 billion square feet today. Our ability to have the mind share from these customers is critical. It's not just about having over 100 million square feet in SoCal. It's having being in the boroughs in New York, New Jersey, London, Tokyo and seeing and working with these customers in all of these markets, and you start to see trends that emerge, not just within the SoCal market or within New Jersey but across the globe. And we can use those trends to help better inform how we operate our portfolio, how we're -- what our view is on rents and how we can help our customers. And so we're really focused on using that data and that scale, that customer line share, the data scale that we have to, number one, help us make better decisions; and number two, helps better serve our customers. Because with our leasing volumes right now, we're averaging at or over 1 million square feet a day. So there's a real data volumes coming in every day, and we are spending a lot of time and resources, understanding that data. So with that, Mike, I'll turn it over to you.

Yes. Maybe one place to start. Reopening has been a big theme over the past several months. And can you talk a little bit about normalcy versus COVID? And just how close are operations to normal these days? And maybe touch on what's happening at the PLD offices, what's happening in terms of client interactions, et cetera.

Okay. I'll start with the customer. I'd say we're at a new normal. We're not going back to old normal. I think there's a new normal of activity. And certainly, on our end, we went into the pandemic with an incredibly strong technology stack. We had digitized a significant portion of our business. We really doubled down on completing the digitization. That work is never done, but just being able to interact with our customers regardless of where they are any time of day, any format. And so if we look at just the leasing process, we went into the pandemic, being able to do that totally electronically, and you can do that today. We can do visits virtually as well. So we can really meet customers any way they want to, whether it's physically showing the space or virtually showing the space and the like. So I think we're in a new normal now where it's a much more digitized operating environment, which I think is a good thing for both our customers and ourselves because it just speeds up transactions, and the supply chain is moving faster than ever. Relative to what it means for us getting back to the office, we certainly would expect to have folks starting to come back in the office after Labor Day, which is what we see with most, at least in the U.S., where -- it depends on where you are. I mean in Asia, we've been back to work for several quarters. But I think there's a new normal there as well, I think the ability to work remotely. Again, we went into the pandemic with a video culture. We were an early Teams adopter and early Zoom adopter well before we went into the pandemic because given our global nature and trying to stay connected, we did a lot by video. So that's really served us well. And I think going forward, a significant amount of our teams are going to be able to work in the office effectively and obviously, out of the office effectively. So I think it's been depending on the role, but I think it's going to allow our teams in the field to be more untethered from their desk and have more customer interactions, which I think is going to be really positive.

Got it. Are you seeing more in-person tours for properties from tenants? Or are they kind of adapting to that new normal where you can do it online, and they're comfortable doing that? Or is it -- you're kind of heading back in person?

It's in between. I think it's going back to -- it's really a new normal. So I think our customers are certainly more used to dealing with things digitally. I think they're ultimately going to see -- to be able to see the space, but I think you can kick things off, understand, whittle things down. And then when they're at the space, they're really at the decision point. So I think it's really streamlined what we're doing. But it's a new normal.

Got it. I'm going to bounce around here for a little bit. But I know in the past, Hamid's talked about parts of the business not being valued appropriately by the Street or just different elements of the story that are being just missed. I mean can you just kind of walk through what are the key areas that you think people on our side of the table don't necessarily grasp when it comes to where the stock should be trading?

Well, I think number one, I would start with our scale and diversity of our business. The ability to operate globally is a really big advantage. And I think when you look at our ability to deliver sector-leading growth and continue to do that, I think being global is an aspect of that from a lot of different avenues. One would just be the customer interaction that I talked about, the scale that we get from interacting with customers globally, the mind share that we get, the data that we get is incredibly important and just allowing us to solve problems and have a bigger data set to better inform how we run and maximize the cash flow for our investors. So the data is a big element of that. But it starts with the customer, it starts with being able to serve them better than anybody else, just given our scale and our capabilities. And then from a data standpoint, 2.5% of the world's GDP that's happening in the warehouses. That's a huge data set that can help us make better decisions and can help our customers run more efficiently. So I'd put all that under the bucket of scale. You've got our strategic capital business that gives us the ability to be global in a very risk-adjusted way because it allows us to access capital from private investors in euro, yen, sterling, right? So we can better operate effectively globally and minimize our FX risk, which we've done really well. We've really almost fully sanitized FX risk. So we can operate globally in a very risk-adjusted way. That's what strategic capital gives us, it's the platform. But from an earnings potential and standpoint, it's an incredibly profitable business, right? It's scalable. We've scaled that business tremendously. It's a high-margin business. We can add more and more AUM of that business with very little G&A. So as we continue to grow and scale, that all comes down. Another thing just to throw in there is we're seeing property values increase. The vast majority of our asset management fees are driven off of fair value of assets, AUM. So we're seeing very healthy uptick in asset management fees and profitability as a result. And then from a development standpoint and land standpoint, we've got an incredibly good land bank and land for redevelopment or covered land plays, I should say. We think we've got about $17 billion of future development today. At Q1, we talked about that portfolio being -- the land portfolio being 40% under market. Clearly, an arrow up today on the value of that land based on, one, what we're seeing with valuations; and number two, what we're seeing with rent growth. And we're really focused on trying to deliver Urban Last Touch city distribution sort of sites. So it's really -- you got to be patient. You have to assemble land. You got to put it together. So we're harvesting today things we put in place 2017, 2018, 2016, and we are building that pipe. So we've got an incredibly strong track record of development. It goes back 20 years. We've developed $36.5 billion of development in the last 19, 20 years at average at 20 unlevered IRR, higher -- over 20% margin. And I am quite confident we can continue with that level of profitability going forward. I'd also point out just the mark-to-market, the embedded in-place to market. It was 13.6% at the end of Q1. It's something we track immensely closely. And given what we're seeing in rent growth this quarter, certainly expect that in-place to market to increase. And a way to think about that, it's -- we're saying that rents are 13.6% below market as of Q1, which means rents need to rise 15.7% to get back to market rents. So -- and that in-place to market delta today, well, as of Q1, represented $660 million of incremental NOI, so -- which is going to drop to the bottom line as we capture those leases, but we're going to see that in-place to market build, and we're going to see that organic NOI growth continue to increase. So as we're generating really strong same-store growth, the pipeline for strong same-store growth in the future is incredibly good. And then just with our proprietary metrics, so just getting back to the data, I think our ability to use that data to our competitive advantage and to help our customers in ways that others can't. I mean you think about Prologis Ventures. We've invested in over 30 different technologies across -- it's $100 million of investments across about 30 investments. And those are there to help our customers, right, and leverage them across our portfolio, and I think they're going to pay big dividends for us going forward because we're very customer-focused, very customer-centric. And then you combine that with the innovation that we're doing. We'll probably spend close to $90 million this year in IT and technology initiatives, such as just running the business, but also mostly 2/3 of that is innovation, doing something different. So we're putting a lot of mind share and capital into this making investments and then making investments ourselves to harness the power of our scale and to help customers, which is ultimately going to lead to more cash flow for us down the road.

Got it. Got it. And probably want to circle back on some of those points, but we do have a question from the audience. Let me see. PLD has always been close to consumption centers. How do you see the current inflationary environment, changing consumption behavior and perhaps your tenant mix over time, if at all?

I'm not sure of it really well. I think -- I don't think it's going to have a real impact, quite frankly. Certainly, things are getting more expensive everywhere. We've seen, obviously, steel costs and the like go up. I think that's going to sort itself out. But certainly, building assets and getting logistics facilities closer into urban areas is getting more and more difficult and more and more expensive just with entitlements and restrictions that are out there. But you know what, that's a good thing. We have almost 1 billion square feet. We've been at this for 30 years. It would be extremely hard to replicate our portfolio, and extremely expensive to do it. So these limitations on supply are ultimately a good thing. And ultimately, what lead us to have sector-leading growth for those very reasons.

When you -- going back for a second, looking at the mark-to-market, you were talking about, I mean, how does that vary by region? You mentioned about 13%, 14%. But if we're thinking about Europe, Asia, North America?

Yes. So think about U.S. being more like 16% and Asia being -- or Europe being more like 11%, 11%, 10%, 12%, something like that. And then Asia would be lower, I'm going to call it to 3%, 3% or 4% range. And Mike, just one quick thing just for people to help think about same store. And if you simplistically think about same-store as being solely by rent change, which it really is. So if occupancy is going to stay flat from here, bad debt is normalized. It's going to be flat. You should think about same-store growth just from the rent change on roll. So if we've got an in-place to market, 13.6%, but that's really 15.7% rent growth. So that's your average, right? So that means something that is going to a roll tomorrow is probably 30% -- 25% to 30% under market. So when you start to think about our rent change, just think about 25-ish, 30% rent change on roll against 15%, 17% roll. And you're going to get same-store with the 4 in front of it. And I think that's what you're going to see, and be in-place to market, I think, is going to further build out. So the runway for that same-store just gets elongated. And a simple way to think about it, if your rent growth is equal to your same-store growth, your in-place to market kind of stays flat. So it doesn't budge. So you're just continuing to have capture -- to have that NOI roll in the future. Your nest egg doesn't diminish. And in a market like we're in where we're going to see rent growth higher than our same-store growth, you're going to see that in-place to market build and your nest egg for the future is going to build.

Got it. You want to maybe head down that path a little bit more. We're talking about the same-store. Now if you roll everything up that PLD has going on that you were talking about before, the development pipeline, I mean, what do you think the math is, the high level math on what the CAGR that spits out over, say, a 3- to 5-year period, internal growth, external growth, everything?

For the whole company, all business lines?

Yes.

No, listen, we put out -- I won't give you guidance, but we put out 8% to 9% growth at our Investor Day in November of 2019. And we have a stronger rent growth outlook today than we did prepandemic for 2 reasons: one is e-commerce penetration is much higher. And two would be the carrying more inventory. We think our customers over time are going to carry more inventory. So that's just going to drive higher rent growth over time. So I feel extremely good about organically being able to generate that 8% to 9% growth going forward. I feel better about -- I felt great about it in November of '19. I feel better about it today for those very reasons and just watch our mark-to-market. As that grows, right, that's just further buffering your growth going forward. Strategic capital business is further scaling. And then you've got our essentials business that is not contributing much to the bottom line right now, but I certainly expect going forward that it will. So I feel very good about our growth. And I'm glad you brought that up. I'm sorry, one of the things is because we get the question kind of as well, "Are you too big to grow? You've got almost 1 billion square feet." But when you're in the right locations, you've got these infill assets. It's really all about that organic growth. So that's why I want to point people to watch our in-place the market, right? That's your forward path. That's your pipeline for future NOI growth.

Got you. And I -- we got about 15 minutes left. I want to circle back, touch on ESG, maybe a little bit more in essentials and stuff, but you have a couple of questions here. One, you kind of touched on, from the audience, are companies looking today to expand and adjust their in-case inventory levels? And then what do you think of the risk of a drop-off in demand in 2022?

Great. So the first question was...

Expanding inventories.

Expanding inventories. Thanks. We've seen it in isolated cases. I think health care is a good example, pharma, but I don't think it's really taken hold yet. And you can see that with inventory-to-sales ratios. They're still quite low, almost historically low because the supply chain is pretty bare. I mean whether it's the -- you see it, whether it's chips or whether it's blockage to the Suez Canal, those sorts of things. So I think that's really upside for demand is that I don't think that inventory restocking has taken hold yet in any material way. Regarding demand for 2022, listen, it's early. But I don't see any trends that tell me things are going to be any different. And the big thing that anchors me, and I would encourage those of you on here that can is go listen to a 3PL earnings call, go listen to a big retailer, e-commerce company's earnings call and listen to where they're investing in the supply chain and listen to what they're saying. I think most customers are further behind in their supply chain today than they were prepandemic. And yet, we had a lot of growth in 2020, but they couldn't keep up with that. And so I know there's this fear that we brought a lot of demand forward. We certainly did, but the supply chain is just way behind, and I don't think that changes next year.

Got it. And one other one from the audience here. What percentage are in-place rents relative to your tenant's cost structures?

Yes. I mean if you look at like with the supply chain relative to supply chain costs?

Yes.

Yes. I'll give to you. So we are typically -- our rent in our facilities is typically 3% to 4% or less of supply chain costs. Now to maybe look at it a different way and look at it as a percentage of sales as a retailer might, right, what's the real estate operating costs? What's a mall, 11% or 14%, something like that, of operating costs, real estate operating cost per sales are equivalent. So you take that 3% or 4% and equate that to sales. We think it's something where between 25 and 50 basis points, so 0.25% to 0.5%. That's where there's a real pricing leverage. Because a lot of our customers are using their supply chain to drive sales, right? Can I deliver your product faster? Can you give me more product variety? So when you think about what our warehouses can do by positioning that inventory closer to the endpoint of consumption and speeding up delivery, we think there's real pricing leverage there, i.e., what that warehouse can do relative to -- it's 3% or 4% of the supply chain costs are 0.25% to 0.5% of sales. There's real leverage there. And I think that's the other secret for these infill assets of why we're seeing the rent growth that we are. It's not just demand/supply, that's certainly part of it. But it's also what our customers can pay and will pay to have that speed in the supply chain. It's a real value to them, and we're spending a lot of time and resources trying to figure out how much we can push rents in these really infill locations.

Got it. It seems like one area of discussion has become quite topical over the past year or so has been just ESG. I mean we don't have conversations about companies without a question popping off. I mean what should investors know about the priorities for PLD and how ESG fits into the day today?

Well, I'm glad you asked that. It's something that has been the heart of our culture for a very long time. And it stems from just wanting to give back and provide those communities in which we all live and work, right? That's been foundational to us. And we've prided ourselves in being a leader on the governance side of what our disclosures are and how we're structured. And then on the environmental and social side, we've been a forerunner on the solar side of things. We're the third -- I think we're the third largest private producer today in the U.S., and I think we could be the largest. We're the -- I think we're the largest rooftop owner in the world and we're in a lot of semi places. So I think with what's happening now with the global push and particularly in the U.S. with the Biden administration, I think, and emerging technologies there, I think there's going to be a real opportunity for us. And I think just with energy in total, you start to think about autonomous vehicles, electric vehicles, what better place for a truck to charge than at the warehouse while it's waiting to get loaded or unloaded, right? So think about our -- matching our solar capacity with electronic -- with the EV charging. So we think there's a real win-win there on the environmental side and the investor profitability side that we can merge with -- from an energy perspective. So I think, again, the key takeaways for us is it's part of our culture, it's a part about how we operate. And I think we're starting to see a real convergence of being able to do all the things we should be doing from an ESG standpoint, but also having its pencil economically because quite frankly, those 2 doing something ESG responsibility wise didn't always add up to economics. Now it's not that we always have to have the economics to the ESG. That's not the case. But I think there's a real opportunity now, particularly on the energy side and transportation side to have a real win-win for both. And all those -- the $100 million and 30 different investments, a lot of those I think are centered squarely right there where we can do real good for the environment and generate strong cash flows for our investors.

Got it. We've got about 5 minutes left. So maybe we can do a bit of a lightning round as it relates to development. I think you mentioned about $17 billion of potential development coming out of the land bank. I mean can you talk a little bit about what's the current pace, the annual starts that you have underway now? And then what do you think you can comfortably ratchet that up to, what could you? And then what do you think is realistic, I mean, just in terms of the band of development starts?

Yes. I'll try to be quick here. Listen, I think the current level of development that we have, albeit there's probably an arrow that's -- I would say, an arrow up for '22 based on what we're seeing. I'm sorry, arrow up for '21 from what [indiscernible] guidance we've given. And I think for '22, I don't see why it would be much different than it is for '21. That being said, we don't target a specific development number, right? What we try to drive is pricing power in our markets. And the last thing we want to do is develop spec more than the market can handle and diminish our pricing power. So it's a combination of looking at maximizing pricing power, how much can we bring into that market spec-wise, and then what's the return? Are we getting the right return for it? We can be patient, we're patient investors. We can sit in that land and wait for the right time. So if we can drive the -- number one, if we can maximize pricing power in our operating portfolio. Because that's going to drive our highest return for our shareholders, bar none. And then number two is we do it properly, we'll do it. So I think the current levels of where we are, are very comfortable and probably arrow up, and I see that continuing into '22. And we certainly develop less than the competitive set, but that has nothing to do with our ability and acumen as developers. I would put our team against anybody in the world. It's really about the opportunity set. We're developing in tougher places, high-barrier markets and matching that up with maximizing pricing power.

Got it. And maybe got I think 2 or 3 minutes left here. Just in terms of development, when you talk about spec, what's the split where spec for PLD is adding existing building, adding a new building to an existing park versus just a one-off project where you don't have an existing building?

The vast majority of all of our development is building out existing parks or existing clusters, yes. We are not -- we are planting very few new flags.

Got it. Okay. And then on covered land plays, you mentioned that. Can you give us a sense as though roughly how many projects you have underway there, ballpark, total expected investment? Is this a 5-year, 10-year window that you're looking at?

Well, we've been really focused on this. I would say it's the majority of our acquisitions. So there are some sort of covered land play or you're buying an underleased asset that's got 3, 4, 5 years to run. We're a total return, unlevered IRR buyer, and we can be patient, and that gives us an advantage in a lot of situations. But obviously, the vast -- the majority of our acquisitions today are some formally covered land play.

Got it. All right. I think we have about a minute or 2 left. Any last questions from the audience? And then it looks like, if not, we've got 1 minute. Can we circle back to PLD essentials and ventures? And can you give us some examples of the ventures? Like just what are some of the investments PLD has made?

It crosses a lot around information flows, data flows inside the supply chain. It's a lot around energy and around, I would say, technology inside the buildings is what we're focused on. So it's anywhere in, I would say, transportation focused. Anywhere that we can see opportunities to help our business. And the other thing, too, is just around training. I should have mentioned it with ESG, what we're doing around our workforce training initiatives as well. Giving back to the communities and really helping our customers relative to their employment needs, sort of our community workforce initiatives.

Got it. I think we're going to get closed out here in a minute, but a question did pop in here, which is what's the one thing you want investors to better understand about your business?

Yes. I think it's just the totality of how we operate and the advantages that we have with being global and scale and how that is going to translate into value over time. And again, I can't under -- our scale advantage is a key driver to our profitability. Why can we deliver sector-leading returns and why are we so confident about our returns going forward? It's the underlying assets, right? We've got this 1 billion square feet of incredibly well-located assets. And then you -- on top of that, you put our scale. So that gives us customer mind share. The innovations that all the investments we're doing, innovation in these 30 different technologies and companies, $90 million plus a year on IT spend to look for innovation, ways to make us more efficient, ways to help our customers. Our strategic capital business, that is a highly durable and highly profitable business that allows us to operate effectively globally. You put that all together, it's unmatched. No one has that. And I think people kind of look at the pieces and say, well, gosh, Europe is not growing as fast as the U.S. But you forget that we've got the development business, we develop more outside the U.S. than we do in the U.S. We have the strategic capital business. So in the totality, we are getting outsized returns in everywhere we operate. And that gets back to why we're going to continue to generate sector-leading returns. So I think just helping people understand that aspect.

Got it. And that's great. And Tom, thanks for the time. Everybody, thank you for attending, and have a great rest of the conference.

Mike, thanks for hosting us. We appreciate it.

Any time.