Greetings. And welcome to the Prologis Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator provided instructions. Please note that this conference will be recorded. I will now turn the conference over to our host, Jill Sawyer, Vice President, Investor Relations. Thank you. You may begin.

Thanks, Diego, and good morning. Welcome to our fourth quarter 2022 earnings 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 other 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 for those measures. I’d like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, our CEO and our entire executive team are also with us today. With that, I will hand the call over to Tim.

Thanks, Jill. Good morning, everybody, and welcome to our fourth quarter earnings call. Let me begin by thanking our global team for delivering an excellent quarter and year. We have had outstanding results despite challenging headwinds from the capital markets and the overall economic backdrop. In the face of this, our focus has been to serve our customers and investors putting our heads down and executing on our long-term plan. As you see in our results, our portfolio is in excellent shape, driven by still strong demand and a continued lack of availability. This foundation for our business not only drove our nearly 13% increase in year-over-year core earnings, but it also sets up the company for sustainable growth for years to come. Turning to results. Core FFO excluding promotes was $4.61 per share and including promotes was $5.16 per share, ahead of our forecast. In the fourth quarter, our operating results again generated several new records. Occupancy increased to 98.2%, with retention of 82%. The Prologis portfolio excluding Duke added 30-basis-point of the 40-basis-point increase over the quarter. While we tend to quote occupancy, it is notable that the portfolio is 98.6% leased, a record that underscores the tightness across our markets. Rent change for the quarter was 51% on a net effective basis. The step down from our third quarter rent change of 60% is a reflection of mix and not market rents. In fact, market rent growth exceeded expectations during the quarter, increasing our lease mark-to-market to a record 67%. These results drove same-store growth to 7.7% on a net effective basis and 9.1% on cash. The Duke portfolio having closed on October 3rd, is fully integrated in these results, with the exception of same-store growth, which will not be reflected until the first quarter of 2024. On the balance sheet, while access to the debt markets have remained challenging for many issuers, we successfully executed a number of transactions during the quarter, raising over $1.1 billion at an interest rate below 3%, including $700 million of new unsecured borrowings out of Japan and Canada. Our credit metrics continue to be excellent and we have maintained over $4 billion of liquidity at year-end with borrowing capacity across Prologis and the open-ended funds of $20 billion, expanded significantly due to our balance sheet growth from the Duke acquisition. With regard to our markets and leasing activity, the bottomline is that conditions remain healthy and there is little we see across our results or proprietary metrics that point to a meaningful slowdown. We see a normalization of demand and when combined with low vacancy, it continues to translate to a meaningful increase in rents. Across our markets, rent growth was nearly 5% during the quarter, driving the full year to 28%. Proposal activity for available space was consistent with our recent history, and given persistent low vacancy, there is simply a very small number of units to even propose deals on. As evidenced, over 99% of our portfolio is either currently leased or in negotiation. Utilization remains high at 86%, near its all time record and deal gestation ticked up over the quarter, indicative of more careful consideration and time being taken in leasing decisions. While we are watching e-commerce carefully, its share of overall retail sales have increased to 22%, which is 600 basis points above its pre-pandemic level. Putting the nuance of mix, timing and other factors aside, as measured by retention, occupancy or rent change, it is clear that customers need to commit to space to market conditions, which offer them very little choice. In terms of supply, the development pipeline across our market stands at 565 million square feet and our expectation for the year is that the pipeline will decline. Deliveries will put modest upward pressure on vacancies from 3.3% today towards 4% later in the year. However, new development starts are slowing in response to the market environment, which will reduce vacancies in late 2023 or 2024. In Europe, we expect deliveries to outpace absorption by approximately 30 million square feet, expanding the current 2.6% vacancy rate to approximately 3.5%. Finally, and as expected, our true months of supply metric grew to 25 months in the U.S. from 22 months last quarter. As a reminder, this metric has averaged roughly 36 months over the last 10 years. In capital markets, transactions continue to be slow in the fourth quarter, making price discovery challenging. That said, return requirements are trending to the low-to-mid 7% range. This expansion further affected appraised values in our funds, although continued rent growth has mitigated some of the effect. Our U.S. values, which were appraised by third parties every quarter, declined 6% this quarter and 7% over the entire second half. In Europe, values declined approximately 12% during the quarter and 16% over the half. Our open-end funds have received only modest redemption requests, less than 3% of net asset value during the quarter, totaling 5% across the second half. Our flagship funds have strong balance sheets with low leverage, largely undrawn credit facilities, cash on hand and undrawn equity commitments. While we believe the value declines over the second half reflect market, investors are still adjusting to a new environment. Because we strive to be consistent in our actions and fair to all investors, we will redeem units, call equity and resume asset contributions when price discovery has run its course. We expect that to be one quarter to two quarters away likely sooner in Europe. This will ensure certainty, fairness and consistency to all of our investors. Turning to our outlook for 2023, while our macro forecast assumes a moderate recession, which may put headwinds on demand, our business is driven by secular forces and long-term planning by our customers that should limit the impact unless such a downturn becomes significant and protracted. As mentioned earlier, we believe vacancy will build in the market and our portfolio, both of which are unsustainably low. Putting this sentiment together with our outlook on supply and demand, our 2023 rent forecast calls for approximately 10% growth in the U.S. and 9% globally. We acknowledge that our rent forecasts have proven conservative in recent years, but we are comfortable with this starting point given the environment. Specific to our portfolio and on a our share basis, we expect average occupancy to range between 96.5% and 97.5%, roughly 50 basis points lower than the 2022 midpoint. Combined with rent change, we forecast to generate net effective same-store growth of approximately 8% to 9% with cash same-store growth between 8.5% and 9.5%. Given these assumptions, we believe our lease mark-to-market will be sustained or even increased over 2023, ending the year between 65% and 70%, and providing visibility to an incremental $2.9 billion of NOI after the more than $300 million that will become realized over the course of this year. We expect G&A to range between $370 million and $385 million, reflecting not only inflation in wages and other corporate costs, but also additional investments we are making in our Essentials business particularly in the energy teams. In that regard, we expect the contribution to FFO from Essentials to range between $0.07 and $0.09 this year. This reflects 70% growth in revenues and tax credits from 2022, but offset in the near-term by our higher Duke related share count and the G&A investments just mentioned. In terms of operational metrics for the business, we expect to add 115 megawatts of solar power over the year driving the portfolio to approximately 540 megawatts by year end. It’s worth noting that we closed 2022 as the second largest on-site power producer in the U.S., a position we will build upon with our plan for 1 gigawatt of production and storage by 2025. We also forecast to have over 20 EV charging clusters installed and operational by year-end. In deployment, we will continue to be disciplined in our approach to new starts. We have over $39 billion of opportunities to select from in our land bank and between our expectations for build-to-suits and logical markets prospect, we see an active year of starts initially to range between $2.5 billion and $3 billion with a real opportunity to grow as conditions warrant. As mentioned earlier, we plan for redemptions to be cleared out over the year and private fundraising to resume. Accordingly, we forecast contribution activity to occur primarily in the second half and resulting in combined contribution and disposition guidance of $2 billion to $3 billion. Finally, in strategic capital, we forecast revenues excluding promotes to range between $500 million and $525 million, which is impacted by valuation write-downs across 2022 and the first half of 2023. We are forecasting net promote income of $0.40 based on an assumption that U.S. values in USLF, primary source of 2023 promotes, will decline further from values at year end; every 1% change in asset value equates to slightly less than $0.02 of net promote income. Putting this all together, we expect core FFO excluding promotes to range between $5 per share and $5.10 per share. At the midpoint of our guidance, this represents approximately 9.5% growth over 2022. We are guiding core FFO including promotes to range between $5.40 per share and $5.50 per share. In closing, this guidance builds upon an exceptional three-year period of sector-leading earnings growth. At our 2019 Investor Day, we presented a three-year plan, targeting 8.5% annual growth, we achieved nearly 14% over this period, 550 basis points of annual outperformance. We expect 2023 to be a year where headlines continue to be disconnected from our business and ability to deliver strong growth and valuation. While there are many unknowns generally, there are more knowns in our business that are clear, such as our lease mark-to-market, significant and visible opportunity in our land bank, a need and excitement for a new generation of sustainable energy solutions, and a dedicated team that is the best in the business and laser focused on delivering leading results. We will now turn the call over to the Operator to take your questions.

Thank you. Operator provided instructions. Our first question comes from Steve Sakwa with Evercore. Please state your question.

Yeah. Thanks. I guess good morning out there. Tim, I just wanted to clarify in your kind of going through your guidance, you throw out a lot of numbers. I just want to make sure on the mark-to-market numbers that are embedded in your same-store NOI growth of 8% to 9% GAAP and 8.5% to 9.5% cash. Just what are you expecting for cash and GAAP leasing spreads and I just want to make sure that’s different than the kind of overall portfolio mark-to-market you talked about 65% to 70%?

Yeah. They are going to be stronger. As you think about the lease mark-to-market, it’s all of the leases, so it represents old leases and leases just done. So, clearly, everything that will roll next year is going to be above the 67% reporting today. It’s a little bit flatter than you might expect as we have looked at it. I think leasing spreads next year are going to be in the high 70s to low 80s on a net effective basis and then as we know that the cash basis of that has trended towards about 1,500 basis points or so inside of that.

Thank you. Our next question comes from Craig Mailman with Citi. Please state your question.

Hey. Good morning, everyone. I just want to hit on the capital deployment side of things, maybe a two-parter here. First, on the stabilization, what is stabilizing the $2.8 billion at your share, and can you bridge that gap versus the $5.5 billion you have on page 20 of expected deliveries or completions in 2023? Also, can you give us some sense of timing on that — I think about 30% of those are build-to-suits — and how you are thinking about preleasing on the balance of that and how it layers into your occupancy assumption?

Yeah. I will take it, Craig, it’s Tim. I will take the first half and Dan can help with the second. This is really a date issue, not even an issue, but just a function of the timing. We believe a large portion of that stabilization will occur in the first quarter of 2024, and there is a real possibility that if we improve leasing timing by a month or two, a decent amount could shift back into 2023. It’s simply a function of crossing the calendar year as the mix of our projects lands.

And this is Dan. I will just pile on there. The pre-leasing in that portfolio, as you see, there’s 29% of that that’s in there as a build-to-suit. The pre-leasing is better than that 29%, and I would say, on track with historical averages even on a bigger data set here. So we feel really good about delivering our stabilization at this year and next.

Thank you. Our next question comes from Ki Bin Kim with Truist. Please state your question.

Thanks and good morning. I was curious about the investment capacity that you show in your supplemental of $1.5 billion is down from $4.2 billion. I just want to understand what that actually represents? And tying that to your comments about contributions perhaps picking back up if conditions settle out, how does that comment compared to the $1.5 billion capacity and how much runway do you ultimately have an increase on that capacity? Thank you.

Hey, Ki Bin. So what I would do with regard to investment capacity is relying more on the way I am describing it in our prepared remarks, the $20 billion and $4 billion or $5 billion across the funds. The number that’s presented in the supplemental, which is what I think you are referring to is a bit technical about the current amount of equity that can be drawn in the funds and then that number is levered slightly, so that’s why it’s a bit understated. The number we supplemented with in prepared remarks is looking at the overall leverage of the fund and how much more capacity sits beyond just that of committed equity post-leverage. So, for example, our USLF venture is very low leverage, just about 10% and that creates an incredible amount of debt capacity, as you can imagine. And I think that winds up addressing your second question, which is the liquidity and the funds for contributions, there’s a lot there for us to have over time.

Thank you. Our next question comes from Derek Johnston with Deutsche Bank. Please state your question.

Hi, everyone. How are you doing? Can you give us an update on the markets in Europe, the mark-to-market there, any leasing trends? I think you touched briefly on the private market transaction backdrop. We definitely see the U.S. mark-to-market getting wider. I guess how do you view demand in Europe and the differences between the U.S. and Europe unfolding in 2023? Thank you.

Yeah. Let me start with some general comments. Europe is generally a mild and more muted version of the U.S. both on the way up and on the way down and the market has a lower vacancy rate than the U.S., if you can believe it. So that’s a general backdrop. That’s very consistent with the way Europe has behaved in the last 10 years or 15 years. As to the specifics on mark-to-market and alike, Dan, do you want to cover that?

Yeah. Sure. Lease mark-to-market in Europe is about 28%, and I would say, just overall, we feel very good about the leasing demand in Europe right now. We talked about in the remarks about an expansion in the vacancy, but overall, we feel really good about where it’s headed.

You might ask about the U.K., because that’s the one you hear about all the time, and actually it’s been really strong so far. We have been pleasantly surprised by the U.K. The other market that has held up well is Germany, which you would have expected to be softer given energy issues, but it hasn’t been, and there’s virtually no vacancy there. Some of the manufacturing returning, particularly autos, is really strengthening Central and Eastern European markets, especially Poland, where a perennial vacancy is starting to tighten up.

Thank you. Our next question comes from Nick Yulico with Scotiabank. Please state your question.

Thanks. I want to dig in a little bit to the sectors that you are seeing driving leasing demand, let’s say, in the fourth quarter and so far this year, whether you have seen any changes in types of customers taking space versus a year ago? And then, I guess, when we think about the broader retailer bucket, where you did see some retailers reporting year-over-year sales declines in the back half of last year, wondering if any pieces of that category are you seeing less demand?

Yeah. The only category that is significantly below the trend and is likely to be that way is housing, because the starts are slowing. But with respect to other detail, Chris, do you want to take that?

Yeah. It’s absolutely right. Generally, Nick, it was diverse. So whether we look at consumer products, whether we look at apparel, food and beverage customers, we have a diverse range of customers leasing space from us beyond the housing categories, which would include construction, it could include home goods and alike.

Yeah. And retail sales on a real basis, notwithstanding the weaker for instance December and November are good. I think it’s between 2.5% and 3% up compared to the year before. So, yeah, you do hear the headlines of the weaker with retailers, but I think if you look at it overall, it’s actually pretty positive. It’s more positive than the headlines. I wouldn’t say, it’s super positive, but it’s much better than the headlines.

Our next question comes from Michael Goldsmith with UBS. Please state your question.

Good morning. Good afternoon. Thanks a lot for taking my question. You clearly laid out the building blocks of your same-store NOI growth of 8.5% to 9.5% in 2023, where you have a high level of visibility, obviously, a lot of macro uncertainty out there. Can you provide the specific assumptions you have used for your initial 2023 outlook and then just where and how a change in the macro environment could provide upside or downside to your initial guidance? Thanks.

Other than defaults or another immediate, dramatic event, the macro environment is not going to drive the numbers significantly in 2023, because much of the leasing that needs to occur in 2023 is already underway or has been completed. We are dealing with very high occupancy levels. To start, there is not a lot of space to lease, and the real driver of those same-store numbers is the large mark-to-market in the existing portfolio. So do not expect, even if we change assumptions substantially, that the numbers for 2023 will move much. They will, of course, change as you get further into the future. That is one comment I would make. The second is that in each of the past three or four years we began the year with rental assumptions that we exceeded sometimes by a factor of three to four. I am not saying that will happen this year, but there is no reason to be aggressive with our rental-rate assumptions, particularly since they do not affect 2023 anyway. We will see how it plays out, and if we see evidence of stronger rental growth, my bet would be a surprise on the upside rather than the downside, then we will let you know and you can adjust the numbers accordingly. Tim?

Yeah. Just building on that, Michael, if you, within the supplemental, you can see our lease expiration schedule. Out of that, you will see we have about 13% rolling and that’s a mix of what is stated as expiring, which is another 9%, but also things that we have already addressed ahead of entering the year here. So the footnotes will tell you that. You get to 13% there. Start with the 67% lease mark-to-market. You have got 10% market rent growth for the year. You assume we will get that halfway through the year. One thing we see people get wrong is that will take you to a certain amount of rent change. You actually get half that rent change this year, you get half of 2022’s rent change as well. There is a mathematic thing that you need to be mindful of given the quantum of rent change we are talking about lately. That will all get you to close to 9% and then we backed off an assumption on occupancy loss, which we couldn’t point to right now, but just feels prudent in the environment, so we have taken our guidance down there a bit.

Thank you. Our next question comes from Vince Tibone with Green Street. Please state your question.

Hi. Good morning. How should we think about the organic same-store NOI growth for the legacy Duke portfolio in 2023, given them that’s outside of guidance? Is it lower than guidance for the legacy PLD portfolio in the same ballpark, just given the thought that you do any color you could share would be helpful?

Well, it will be lower for one reason anyway, which is that they started at a higher level of occupancy. So putting even rent aside on a same-store basis there’s less opportunity. They generally had longer term leases because they generally have bigger spaces. So that affects the mix, but Tim?

Well, I think, an important thing to remember here and we have seen some people not have this entirely correct modeling is just understanding that on a GAAP basis there will be very little same-store. There’s potential for some, but because we mark the leases up to market now at the close on a net effective basis there will be very little same-store growth, that’s contemplated in our guidance. On a cash basis, I expect it would look quite similar to Prologis.

That’s really helpful.

Thanks.

Thank you. Next question comes from Tom Catherwood with BTIG. Please state your question.

By the way, if I can continue that. One thing that you didn’t ask, but it’s important in this context, and Dan can elaborate, is that the rental performance of the Duke portfolio on the few spaces that have come up for releasing or were in progress during the time we were doing the transaction are trending significantly higher than what we had underwritten. Dan, can you quantify that?

Yeah. I actually go as far as saying we expect to outperform the operating portfolio to 11% to 13%, call it, now 8% of that is going to come from market rent growth, so really 3% to 5% of that comes from just operating that portfolio in the Prologis platform.

Thanks. Tim, you mentioned in your prepared remarks that the outlook for 2023 assumes a recession and if we look back to previous recessionary cycles, usually we get declines in consumption, which drives lower demand for industrial space. But we have also never started a cycle with kind of persistently low vacancy like we have right now or tailwinds from e-commerce and supply chain reconfiguration. So kind of within that backdrop of assuming a recession, how do you think it could be different this time and kind of what do you have baked into your numbers for that for 2023?

Tim was in kindergarten when the cycle started, so Tim and I have slightly different recession outlooks, but I don’t think it matters. Tim would say that if there’s a recession it would be very mild; my bet is we won’t have a recession, though GDP growth could be close to zero for a while. So whether you call it a recession or not, the outcome is similar. What’s different about this cycle — and I say that with a lot of dislike for the phrase “this time is different” — is that there were really two episodes of negative absorption in the U.S., where we have data. One was at the peak of the dotcom era, when vacancy was very high and utilization very low because a lot of capital went into dotcoms, especially e-commerce retailers, and they took space well ahead of demand, creating a lot of shadow space. That produced a very high vacancy market around 2000–2001. The next significant negative absorption was in 2008–2009, for reasons we all know, and vacancy had already been substantially higher then — I think it was 7 or 8 percent before things turned. Back then, the old Prologis with the troubled LA loan had 52 million square feet of vacant speculative space to lease; I think AMD at the time had about 8 or 9 million square feet. That’s nothing like what we’re talking about now, particularly given the different scale of companies and how low vacancy is at the start of this cycle. Even in those downturns, when we normally ran about 95 percent occupancy, we fell to about 91 percent in both cases. I don’t see anything close to that now; mathematically it’s impossible. Even if absorption went to zero and we stopped leasing any under-development speculative space, we’d be under 5 percent vacancy, which used to be considered a very strong market. And the capital markets were different then — mark-to-market adjustments were in the mid-single-digit range, whereas now we’re talking almost 70 percent. It’s a very different picture.

Thank you. Our next question comes from Todd Thomas with KeyBanc. Please state your question.

Yeah. Hi. Thanks. Good morning. I just had a question about market rents actually, so the 10% market rent forecast in the U.S. Can you just discuss that or break it out a little bit for us in terms of coastal versus non-coastal in terms of your expectations just in the context of supply growth that you are seeing and the demand backdrop in general?

Yeah. Hey. It’s Chris Caton. So indeed we expect 10% in the U.S. that’s going to vary. Typical spread between coastal, non-coastal is 300 basis points to 500 basis points, at least that’s where it was running, say, pre-pandemic and we expect a wider spread in the current environment. So whether you look at vacancy, whether you look at the under construction pipeline, whether you look at the momentum in pricing in the back half of last year including fourth quarter that leads you to conclude on the coastal outperformance continuing at a greater than historical average in 2023.

Thank you. Our next question comes from Ronald Kamdem with Morgan Stanley. Please state your question.

Hey. I just want to go back to some of the comments on the third-party management. I think you talked about valuations being down 7% in the back half of last year and potentially continuing into this year and the redemptions potentially ending in the first two quarters of the year. I just want to get a sense, any more color how are you thinking about that, is it because the valuations have been repriced that you expect sort of the redemptions to stop? What should we be looking for to get more confidence in that? Thanks.

There are two things that usually drive redemption requests. One is the denominator effect and people needing liquidity, and two is some investors trying to arbitrage the lag between how quickly the public markets adjust and the backward-looking appraisal process. In our experience in past downturns, the second has taken about three quarters to be fully reflected in appraisals. So we really don’t want to disadvantage one group of investors. By the way, the vast majority of our investors, about 95%, are not trying to arbitrage that difference; only a couple of percentage points are, so we want to make sure the valuations are right before those things transact. We think Europe has actually adjusted quicker than the U.S., and that’s why we think there’s maybe another quarter to go before Europe fully adjusts. We are committed to taking care of those redemptions in the next quarter. We think the U.S. may take another quarter to adjust and we will take care of those in the second quarter. Here’s what’s important and what people don’t get about the structure of our funds. First, our leverage is in the low 20% range on these funds, so there’s plenty of liquidity in these firms to be able to handle any reasonable redemption request. Second, we started the quarter with some cash on hand. So there are lots of sources for addressing those redemption requests. I think you should assume that redemptions that have been effective as of the end of this quarter will, by and large, be taken care of by the middle of the year and sooner in Europe, so you can model that math accordingly. One other thing that’s kind of interesting: Prologis could be a buyer in these funds. In the global financial crisis, when the old AMB was in a tighter spot with respect to leverage, we actually stepped up and bought on very attractive terms with adjusted values — a couple hundred million dollars of real estate — and we offered it to our outside investors first and then stepped in and bought it. The next quarter, all the redemptions went away because people realized that the people who know the most about this portfolio were buyers at those prices. So it’s really about getting the values right. We started writing down these portfolios a quarter or two ago and our appraisal process is independent. We have nothing to do with it, and that’s very different than some of the redemption situations we have all been reading about.

Thanks. Our next question comes from Camille Bonnel with Bank of America. Please state your question.

Hi. Good morning. On your development guidance, can you give us some color on how much conservatism is built into your development starts? And also you are expecting another year of strong stabilization, what assumptions are you making in terms of timing of these projects and is any of the increase in guidance driven by projects from last year taking longer to complete due to longer construction time lines?

This is Dan. Let me start with this year’s development start guidance. We are coming off our largest year of starts ever, and just given the macro headlines, we decided to take a little bit more balanced approach where we slowed our starts at the end of last year. We don’t expect to start up in earnest until the last half of this year. We think the build-to-suit business will pick up at the same time. So call it conservatism, I call it discipline and just feel really good about our approach, given the volumes over the last year or two. And then stabilization next year, stabilization this year, Tim mentioned it earlier, we think we can outperform. What we have in the books right now, demand continues to be strong. We talked about the development starts plummeting in the marketplace in the fourth quarter. We think they are going to be slower in the first half of the year and we think that bodes well for absorption in the last half of this year into next year. So we feel very good about our guidance.

There has not been a material delay in any of our construction projects if you look at them on an aggregated basis. That has not shifted stabilizations from 2022 to 2023 or anything like that. I can’t even think of an example that comes close. Even on the cost side, because we have been thoughtful about procurement and securing some of these types of supplies ahead of time, that has actually been something we use as a competitive advantage when marketing build-to-suits. We have a bunch of steel and a bunch of air conditioning units and electric panels and other items that are assured supply already sitting in our warehouse waiting to be deployed into our land bank. So no, there’s nothing funny going on about that. By the way, stabilizations are not just a function of completion of construction but also leasing being stabilized at 90% or more, and that factor hasn’t delayed stabilizations either. We have been leasing ahead of plan to this day and I expect to continue to do that.

Thank you. Next question comes from John Kim with BMO Capital Markets. Please state your question.

Thank you. On the subject of fund redemptions, there are some unlisted funds or non-traded REITs with a different leverage profile than yours, different investor base that are seeing a significant amount of redemption requests and I was wondering if you anticipate this will lead to increased asset sales on the block and potentially some more opportunities for you on the acquisition side?

I hope it does. I am not optimistic that it will, because if you look at even the denominator problem for most institutions and the fact that they generally have to reduce their exposure to real estate, they are likely not going to want to reduce their exposure to industrial. I think with most open-end funds, where their mix includes different property types, industrial is what's holding up their performance. For them to disclose those would put them in an even more difficult situation. I don’t think there will be a lot of forced sellers in industrial, because to the extent you are dealing with a leverage or liquidity issue, if you sell your highest-yielding assets you keep tightening the coverage and the noose around your neck. As much as I’d like to, I don’t think we will see a lot of that. I think where we could see opportunity is actually within our own open-end fund availabilities. If redemptions continue and we think the values are good, first we will offer that to all the third-party investors and then we will step in and buy. We like that real estate. We know it well and we operate it, and if it’s priced right, we are all buyers, no problem.

Thank you. Next question comes from Michael Carroll with RBC. Please state your question.

Yeah. Thanks. I guess, Hamid, I understand that PLD in the industrial space in general are pretty well positioned in the current environment despite the uncertainty, but is there anything that you are watching out for any specific risks that you foresee for this space here in the next year plus or so?

Yeah. We are watching everything really carefully. I mean I am not, believe me, we have been through enough cycles and enough where things can happen that none of us predict that we want to be vigilant. That’s why we are starting out the year with very conservative assumptions and things that we can deliver. I mean, I think even on this basis, we are going to, I think, put up unbelievably good numbers. I mean, who can think of almost a digit kind of returns or growth off of such strong growth, 14% per year earnings growth consistently for the last three years. So I think the arrow is up. But, yeah, I mean nobody predicted Putin going into Europe last year. It’s usually the stuff that you don’t, you can’t predict. I mean, am I worried about inflation really tanking our numbers? No. Am I really worried about recession tanking our numbers? No. Am I worried about e-commerce going out the window and people going back to shopping deals the way without that percentage going up? No, I am not worried about those things. But I am worried about things that I don’t even know what to worry about. You get my drift there, anyway. So, yeah, there’s always bad stuff that can happen that are out of the realm of normal projections.

I would just pile on. On a net basis, the activity is still very strong, decision timelines have definitely stretched out as people are being more cautious. But remember, these structural configurations we have been talking about for two or three years continue to march on, perhaps at a bit of a slower rate, but ultimately, it comes down to the fear of not having the right space when you needed to. That fear is outweighing taking space that’s a little bit too early. So broadly we feel pretty good about this overall activity.

Thank you. Our next question comes from Mike Mueller with JPMorgan. Please state your question.

Yeah. Hi. What are the anticipated yields for your 2023 development starts?

The anticipated yields are actually up slightly, but still in the low 6s, 6.1-ish, 6.2-ish.

Thank you. Our next question comes from Anthony Powell with Barclays. Please state your question.

Hi. Good morning. Question on utilization, which increased in the quarter, what drove that growth given all the headlines we see about port volumes were not declining and how big of a driver of the higher utilization is for your outlook for this year given the strong outlook this year?

Yeah. I don’t think utilization actually moved that much. I mean the peak utilization ever all time was 87%. And I think that 1 point is well within the sampling bias that can take place, because it’s not a perfect data set. It’s a sample of large data sets. So I don’t think there’s a meaningful trend in certainly not a decelerating trend in utilization. With respect to port volumes, I think, port volumes are pretty meaningless in the last really since COVID started, because there were so many fits and starts and play things being in the wrong place and all that. And yeah, the West Coast ports have lower volumes today than they did before, but the East Coast and Gulf ports are getting a lot more volume than they did before. So on an aggregate basis, port volumes are just fine and if you look at the lag that it takes to move empty containers on one side of the ocean, and factories shutting down on the other side of the ocean and all that. I think until the market normalizes, you can’t really draw any conclusions from port volumes. So I don’t see either one of those two trends affecting demand. Chris, do you want to?

I will just build on that by saying two things are also happening. One is market vacancies in the U.S. are 3.2%, 3.3% and lower in Europe. That, in its own right creates some pent-up demand and so there’s a need to push utilization within the facilities. And then second, look, inventories are up 15% on a year-on-year basis on a nominal basis and 9% to 10% on a real basis. So there is real structural demand, lifting new demand, as well as in-place customers.

Notwithstanding that increase in real inventories, we still think we are less than halfway towards equilibrium level of inventories about 45% of the way there. So we think there’s a lot of tailwind behind inventories, too.

Thank you. Our next question comes from Blaine Heck with Wells Fargo. Please state your question.

Great. Thanks. So related to that last question, and Hamid, your comments on that progress towards equilibrium inventory, can you just talk about your recent conversations with customers? What’s your sense for how they are balancing this investment need and CapEx spend against concerns about the economic slowdown or recession and higher overall cost of capital?

Yeah. I'll pitch it to Mike for more detailed comments on this. My sense is that customers don't have as much FOMO as they did before. In other words, they're not acting with a "we must get this place now or someone else will" mentality. I think the market has rationalized in terms of the pace of leasing demand, and people are being more thoughtful about how they approach space decisions, because beyond rent there is significant CapEx every time you open a large warehouse. Real estate is the least of your worries; it's everything else you have to put in. So people are cautious, but they also realize, particularly on the e-commerce side, that this was a theoretical threat before COVID. Now they see what really happened to their business during COVID, so they are eager to build out their full e-commerce supply chain, which is often different from their bricks-and-mortar supply chain. Demand has broadened; it's much less all about Amazon and much broader than that. It's pretty strong. Is it the strongest it's ever been? No, it's not as strong as 2021. But compared to any 10-year period you want to look at, we would consider this a very strong market. Mike?

I would just pile on. The activity is still very strong, decision timelines have stretched out as people are more cautious. But the structural configurations continue to move forward. Ultimately it comes down to ensuring the right space is available when it's needed, which continues to motivate customers.

Thank you. Our next question comes from Craig Mailman with Citi. Please state your question.

Hey, guys. I just want to follow up on these demand discussions, because this is a constant question I get from clients here and maybe it’s more of a Chris question, but Hamid feel free to jump in, too. Just in terms of in these era of low vacancies where we’re really not in the least, so net absorption is not necessarily the best leading indicator of demand. I mean what are you guys using at least to kind of use as your forward-looking indicator on and destruction or something that the market could look to, because it just seems like retentions are still high, availability is low, construction could fall off, but everyone is talking about inventories big higher, utilization will be higher, so people needing less of the space, but it’s just from your commentary, it seems like this is not really filtering through what you guys are seeing and just some thoughts there. Then related to that, Chris, I mean, what would it take for market rents to actually turn negative, because that’s a question I get a lot as well and I am just kind of curious in your modeling kind of what inputs with that to really turn to get that from the positive 10% you are seeing to somewhere below zero?

Okay. Let me start. In 40 years on this, this is the biggest disconnect that I have seen between the macro economy and the prospects for our business. Usually, those things are much more aligned and this time around, they just appear to be completely disconnected for a variety of reasons that we talked about at nauseam. So I think where pricing goes away is, vacancy going to 7% to 8% and staying there. And if you do the math on that, you need another in the U.S., I don’t know, 2 billion to 3 billion square feet of unleased construction coming online and you can’t do it overnight, maybe 1 billion something median. We can do the math. But it’s a big number and you are not going to keep doing that if the first 100 million feet doesn’t lease, you are not going to do that. And by the way, this cycle, you have a couple of big players in the business that have much more to gain from the fundamentals of the business being stronger, rents being stronger than a few bucks they may make on additional development. So there is an economic incentive to be disciplined. In prior cycles, mostly driven by merchant builders and private developers, they didn’t really care what their rental market was. They just wanted to build the product and sell to somebody else and that would be their problem. Today, those two sides are connected. So I think that the motivations are really different and absent a nuclear-type of scenario. I just don’t see vacancy rates going to a level that will lead to a reduction in rents. It’s either going to be a demand collapse or a supply explosion and I don’t see either one of them happening. The other thing I would say is that we lease about 1 million square feet on a daily basis. Let’s get our heads around that, 1 million square feet on a daily basis. That is 10x the amount of space than anybody else in leases in any sector in real estate. So by watching these customers and their behavior, obviously, we will figure out if some bad stuff is about to happen and won’t be waiting for the quarterly report to analyze that.

A couple of specifics, our proprietary data leads us to these conclusions. For example, our sales force pipeline, if we look at the vacancy that we do have, 46% has deals working. That’s in line with or above the average that we have experienced through COVID. We publish our IBI survey and our utilization data and figures like 60 on our IBI diffusion index are consistent with a good tone. Utilization at 86% is another signal. And importantly, development starts rather than completions: starts in the U.S. were off by a third in the fourth quarter relative to their 2022 trend and on Continental Europe they were off by about 45%. So we are seeing a sharp marking to market at the capital market environment and the valuation environment, which is slowing starts.

By the way, banks are a lot more disciplined, because now they have risk-based capital requirements. So putting out a lot of construction loans on buildings that don’t lease like used to happen in prior cycles is less likely to happen. So I think the market is generally smarter. There’s a lot more data. Conversations like we are having today never used to take place two decades ago. So the cycles were much more amplified. I think it’s pretty hard for that to happen. But something can come out of left field. I am not discounting that possibility. Something really bad to come out of left field and change all this, but I just can’t think of what that thing would be. None of us predicted the pandemic. So things can happen.

Thank you. Our next question comes from Vince Tibone with Green Street. Please state your question.

Hi. Thanks for taking my follow-up. I just want to get any color on recent market rent growth and how that may differ between suite size, like are you seeing any differences in performance between bulk buildings and smaller more infill facilities?

I would generally tell you that the smaller spaces are having a tougher time to the extent of anybody having a tougher time, but Chris is looking up the specifics. They are not radically different.

First off, market rent growth had great momentum at the end of the year with 5% growth in the U.S., 3% in Europe. When we look at rent change, which is a great way to understand performance by suite size, it’s strong across the board. In fact, late in the year, we saw an improvement in those smaller units, which might be where your question is coming from. And if we flip it to submarkets and we look at infill which tend to have those smaller units, infill outperformed in the U.S. by about 400 basis points last year, so say 34% in infill versus 30% for the whole of the United States.

And our next question comes from Jamie Feldman with Wells Fargo. Please state your question.

Great. Thank you. Just a quick follow-up from Blaine and myself. So where do you expect to make the most progress on the Essentials business in 2023 and how does that factor into your guidance and earnings? And then also if you could just say where you think cap rates are today versus the peak of the cycle, how much they have moved? Thank you.

So two things. I think the Essentials business, in terms of percentage growth, our mobility business would be the biggest, because it’s the smallest right now to start with. So any growth will be the biggest. But in terms of dollar contribution, I would say, solar and storage are coming on the strongest today and operations is close second behind. I will pitch it to Gary if he has any more to say about that after this. Second part of the question was — oh, cap rate. So cap rates are really misleading. So we got to be careful about that. Cap rates at market, assuming that you had a building a year and a half ago at market and you have a building at market today, I would guess it’s 50 basis points to 75 basis points maybe 100 basis points. But you have had all this rental growth in between. So the observed cap rates for the same building this year versus last year with rents that are higher by, I don’t know, 10% to 15% or something, would not have moved as much. So, and if you get into weird situations, like some building that was leased five years ago when it comes on the market and the in-place rent is less than half of what market is, that building could have a lower cap rate than it would have had a year ago. IRR is what’s really important based on reasonable assumptions and my guess is that if I were going to pick a number, I would say, low to mid 7s, 7.25-ish in the U.S. and maybe a little bit lower than that in Europe with growth of, say, 4%-ish across a 10-year projection, something like that, approximately. Gary, anything on this?

I think you got it exactly Hamid. In 2023, our mix is going to be about 50% operations and about 50% energy and mobility. The growth rate, obviously, mobility is going to be much higher because it’s coming off of basically a zero base. Where are we investing? We are investing in our energy and mobility businesses. And that’s where we are building capability, because we actually see the most significant growth in 2025 and beyond. To put a stake in this, we are very convicted about the potential for these businesses. We are on track to generate our $300 million in revenues and tax benefits by 2025, which we have talked about before and that is going to deliver about $0.25 per share in FFO. That will be a little bit above our expectations; it will be about 100 basis points of growth per year compared to our 2019 Investor Day estimates of about 50 basis points. Net-net, we are in great shape, that business is growing right on plan and we are going to continue to make investments in that business and this year it’s going to be in mobility and energy.

By the way, that 2025 number that Gary just mentioned, it’s going to be recapturing maybe 15% to 20% of the total opportunity within our portfolio. So there will be a huge runway for growth, and frankly, we are beginning to see more deals out of our own platform, because customers are taking us to buildings that they lease from other people to do the same level of service to them in those other situations. So I can’t even begin to quantify that out of platform opportunities. So we are really excited about our Essentials business. Okay.

Thank you. This concludes the question-and-answer session. Our last question was taken. At this time I will turn the conference back over to the speakers for any closing remarks.

I think we are at the top of the hour. I know we have one more question, but maybe we can take that outside the call, with our apologies. But thank you for your interest in the company and we look forward to seeing you next quarter. Take care.

Thank you. This concludes today’s conference. All parties may disconnect. Have a great day.