Greetings and welcome to the Prologis Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Jill Sawyer, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Adel. Good morning, everyone. Welcome to our second quarter 2023 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 second quarter results, press release, and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures. 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’ll hand the call over to Tim.

Thanks, Jill. Good morning, everybody, and welcome to our second quarter earnings call. We had a very good quarter with outstanding results across our uniquely diversified business. It was highlighted by record rent change, a ramp-up in development starts, roughly half of which were build-to-suit, and the acquisition of over $3 billion of real estate at accretive returns deepening our scale in key markets. We also earned record strategic capital income and raised $1.2 billion in new equity across the vehicles. We're watching markets closely, and we’ve been clear that we expect vacancies to arise over the course of the year from a normalization of demand and elevated development deliveries. We’ve indeed seen vacancy build and expected to reach the mid-fours in the US by year-end but continue to believe that fundamentals will regain momentum in 2024, with the outlook for new supply declining as development starts continue to fall this year. In short, our outlook is completely unchanged, and we feel great about our business. Turning to our results, core FFO excluding promotes was $1.25 per share, and including promotes was $1.83 per share, both ahead of our forecast. Our promote income was generated from both USLF and FIBRA Prologis and meaningfully exceeded our guidance. USLF generated promote revenue at Prologis share of over $635 million. In its three-year performance period, assets grew by over $10 billion, and the fund delivered an IRR of over 20% net of all fees and with very low leverage. In terms of our operating results, average occupancy for the quarter was 97.5%, down 50 basis points from the first quarter and in line with our expectations. Rent change on starts was a record on both a net effective and cash basis, 79% and 48% respectively. Net effective rent change on signings of more forward-looking build was an impressive 87%, with notable rent changes from Phoenix at a 137%, Northern New Jersey at 150%, and Southern California at a 181%. Global markets also contributed to strong signings with Mexico at 34%, the UK at 36%, Central Europe at 51%, and Canada at 150%. Bottom-line rent change has been both robust and broad-based. Market rents continued to grow, albeit at a slower pace, increasing a little over 1.5% in the quarter. In-place rents grew by approximately 2.5% over the quarter, the net of which translates to a lease mark-to-market of 66%, down from 68%. We explained last quarter that our lease mark-to-market would generate $2.85 per share of incremental earnings as leases roll over time without any additional market rent growth. Interestingly, that future upside is virtually unchanged at June 30th, even though we crystallized rental increases over the quarter. This is because a lower lease market-to-market is now being applied to a larger base of in-place NOI. Ultimately, same-store growth is our most important operating metric, and this quarter remained exceptional at 8.9% on a net effective basis and 10.7% on cash. I'd like to highlight that even with $4 billion of investment during the quarter, the balance sheet remains in impeccable shape, with liquidity of approximately $6.4 billion and debt-to-EBITDA of 4.2x. We raised approximately $7 billion in debt financing across four currencies at an interest rate of 4.9% and an average term of eight years. Turning to our markets, the trend to normalization, which we've been speaking to for some time, continues. Proposal activity, gestation, and pre-leasing of vacancy are all within a few percent of their pre-COVID levels, a period that we’ve highlighted many times was itself historically strong. Our IDI sentiment index ticked in the quarter to over 58, indicating a continued strong backdrop for demand as described by our customers and further supported by utilization increasing to 85.5%. Unsurprisingly, customers have been more deliberate in their decision-making amidst the uptick in vacancy. We continue to believe that this will be a short-lived reprieve as construction starts have indeed declined significantly relative to our expectations. Starts in the second quarter were down approximately 40% across our US markets and 50% in Europe. We see deliveries in 2024 falling short of demand, reducing vacancy over the course of next year. Significant attention has been given to Southern California in recent months, while our portfolio is over 97% leased, and we are achieving record rent change, vacancy has grown partially due to port operations that have not yet returned to normal. Additionally, some customers are re-evaluating expansion in the Inland Empire, diversifying operations to other Southwest markets. With all this in mind, we've reduced our rent growth forecast for Southern California in 2023. However, given what is still low vacancy together with structural headwinds to new supply and a huge consumption base, we believe strongly in this market. The global nature of our portfolio means that we will see markets contribute to growth in different periods, evening out peaks and troughs. We see this playing out in a number of markets across the globe, where our rent growth forecast is increasing this quarter, such as Las Vegas, Texas, Europe, and Mexico, to name a few. All this together with the more than 5% rent growth to date has us re-forecasting the full year to a range of 7% to 9% on a global basis. What matters more than what will transpire in the next six months is what we see over the medium term, which is growth that will be fueled by escalating replacement costs, growing barriers to new supply, and ongoing secular drivers of demand. Late in the second quarter, we announced and closed on the acquisition of over a 14 million square foot portfolio in many of our best US markets. We estimate an 8% unlevered IRR simply at the property level, exclusive of additional returns driven by property management synergies, essentials opportunities, including solar, and the upside we expect through revenue management. While this was the largest transaction in the quarter, overall activity increased slightly, bringing additional price discovery to the market. In Europe, values have been relatively stable, experiencing a 1% decline over the second quarter. Latin America saw an increase in values with write-ups in Brazil and Mexico of 2% and 5% respectively, and write-downs in the US were in line with expectations, approximately 5%, driving the cumulative decline over the last year to 12%. With this move, we view the values as fair and are proceeding on redemption in USLF for the third quarter. New redemption requests in the quarter totaled approximately $800 million and were concentrated in USLF and our China venture where values have held up better. Together with other activity, the net redemption queue stands at approximately $1.6 billion. Outside of open-ended funds, the company raised an incremental $1.2 billion, comprised of $500 million in the FIBRA and NPR, as well as a new $700 million commitment for a complementary vehicle in Japan, PJLF, which is detailed in our supplemental. Before turning to guidance, I'd like to mention a few updates across our Essentials business. We added 45 megawatts of new solar production and storage in the first half of the year, bringing our platform total to 450 megawatts, nearly 50% of the way to our 1 gigawatt goal for 2025. Additionally, Prologis Mobility, our EV business, has more than 65 lead charging sites in the pipeline across the US and Europe. In terms of our outlook for the balance of the year, we are guiding average occupancy to range between 97% and 97.5%. We are increasing our same-store guidance 8.3 quarters to 9.25% on a net effective basis and 9.5% to 10% on a cash basis. Net effective rent change propelling same stores will continue to accelerate in the next two quarters and average approximately 80% over the year. We are maintaining our G&A guidance to range between $380 million and $390 million and are increasing our strategic capital revenue guidance excluding promotes to range between $520 million and $530 million. As a result of the outperformance in USLF’s promotes, we are increasing our forecast for net promote income to $475 million. Year-to-date, we are in excess of this amount, but the amortization expense will continue over the back half of the year. Development starts picked up during the quarter with commencements of 12 projects around the globe, and while we remained very selective on new spec starts, we are maintaining our guidance to $2.5 billion to $3 billion for the year. We had over $550 million in contributions in disposition activity during the quarter concentrated in Japan and Mexico and are maintaining guidance of $2 billion to $3 billion. Putting it all together, we are increasing our guidance for GAAP earnings to range between $3.30 and $3.40 per share. We are increasing core FFO, including promotes guidance to a range of $5.56 to $5.60 per share, and increasing core FFO executing promotes to range between $5.06 and $5.10 per share, with the midpoint representing over 10% annual growth marking our fourth consecutive year of double-digit earnings growth. The quarter highlighted many ways that Prologis has diversified itself across geographies, business lines, and capital sources; while rents in some markets decelerate, others with different demand drivers are now accelerating. We're seeing the same balance with property values as demonstrated over the quarter. Further, we generate incremental cash flows and value creation outside of the pure rent business in closely related and synergistic platforms, namely Strategic Capital development and now Essentials. Our fundraising efforts also demonstrate the value of having alternatives. Clearly, our wide access to debt capital has been a tremendous advantage, but we also benefit from access to varied equity sources for our ventures by utilizing open-end vehicles, JVs, and public structures; we have the ability to be opportunistic and proactive in changing capital markets. As we close, I'd like to remind you of two upcoming events of Prologis later in the year. Our Groundbreakers Thought Leadership Forum on September 27th, right here in San Francisco, and our Investor Forum on December 13th in New York. Additional information for each is available on our website. With that, I will hand it back to the operator for your questions.

Our first question comes from Tom Catherwood with BTIG. Please state your question.

Thank you, and good morning, all. Tim, I appreciate your commentary around guidance on projected rent growth. Kind of a two-part question on that first. Have you adjusted your projection for US rent growth? I think it was previously 10%, and you mentioned it globally now. And then, can you provide some more detail around those markets or regions where as you said you've seen, you know, rent growth and values kind of exceed expectations and then conversely are there others like Southern California that have somewhat lagged your expectations?

Hey, Tom, I'll start and probably pitch it to Chris here for some help on the market detail. But the U.S. at this point, I would put in a similar range, really given the weight of the U.S. and the notion that we're going to put these things in ranges probably from here, it's going to be very similar to the globe. So I would just think of them as essentially the same. And then, in terms of markets, clearly, I mentioned in my remarks that Southern California is the market that we've downgraded. That's broadly the base of our change and pretty much the only market, and it is matched by various markets as are also detailed many in Southeast US, but it's pretty broad around the US, as well as globally that are picking up the slack and holding the average pretty close when you put it in a range.

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

Great. Thanks. Good morning. So we noticed lease proposals trended downward throughout the quarter and gestation increased towards the end of the quarter. Can you just talk about what factors might be driving those trends? And whether you think we'll continue to see lease proposals trend down, or should we expect an inflection in the second half?

Hey, it's Chris Caton. So, really when we look at that data, the right way to look at that is against our open availabilities. And when you put those proposals against our open availabilities they are actually in line or above the historical average, 48% is that number, it's something we've used in the past on these calls. And so how we do make the proposal numbers you're talking about tie with that view, well, there are two or three drivers. The first is that the availabilities just, the role that we have in the next 12 months are low relative to history. The second is those proposal volumes do include, sometimes multiple proposals on a single unit and that has declined over the last year as we've discussed previously. And then, third, there's some seasonality where June would be a soft month.

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

Yes. Thank you very much. Maybe it's open two questions here, I guess, maybe Tim and Chris to follow up on Tom's question around market rent growth. It looks like the U.S. dropped about 200 basis points. And if could you give us some more numbers around what the biggest moving parts of that were from a market perspective? And then, separately on, on occupancy here, you guys seem at 80 BPS sequentially on ending core occupancy and then you're 50 basis points on average. But Secaucus, New Jersey, Central Valley, Atlanta, all kind of came down here. Just curious if there's, if that's where you're seeing the more supply or if you had any incremental impact from the Blackstone acquisition that laid some of those numbers?

Yeah, so, on the rent piece, we're not going to go through market rent growth at a market level for a variety of reasons. I think the takeaway we want you and everyone to be left with is just how it can all come into a balance, and we're very pleased to see that we're able to hold the forecast at least in a pretty tight range to where we were previously. And on the occupancy side, you're right about where the ending pieces. I would just comment that that's in line with our forecast. If you look at our average same-store, average occupancy guidance that we have previously and that we have this quarter, it's unchanged. So, the decline that we have expected over the year remains, and everything that you see in this quarter is in line with those expectations.

Yeah. The one thing I would add to that is that, I think we mentioned to you last quarter that we would be continuing to push rents pretty hard and would like to see occupancies a bit lower than 98%. So, what you think is consistent with what we're planning to do and actually we accomplished what we wanted to do in that we tracked a number of leases that we lose because of price and how hard we were pushing. And we modulate around that to figure out the trade-off between rents and occupancy. So, we did see as a result of our efforts, an uptick in basically the percentage of deals lost due to price. It went up from about 10% to about 20%, which is kind of where we would like to have it.

Thank you. Our next question comes from Caitlin Burrows with Goldman Sachs. Please state your question.

Hi, good morning, everyone. Maybe like to mention there has been a lot of discussion about Southern California. So ask another one there, but I guess just thinking about the idea that it might be lagging now, can you give more details on what could be causing the change in that market? Kind of how long it could last in which markets could potentially face similar issues?

Sure. Let me take a stab at that, because I've seen this now a couple of times over the last 30, 40 years. Southern California is really being adversely affected by two things. One, ports volumes. I think this labor strike has gone on longer than most people anticipated. And the timing of it was such that people have to make decisions about the Christmas season, and they've shifted volumes to other ports. And that affects Southern California and honestly, the longer this goes out, I believe the worse it will be for Southern California in terms of doing permanent damage. From now from everything we hear, and we're not an expert on this, things are apparently heading in a positive direction with respect to a resolution. But you read the same things we do. So, I don't have any unique perspectives on that. The other difference with Southern California is just pricing. I mean, you had between ‘20 and ‘22, about a 130% increase in rents in Southern California, that compares to less than half of that for the overall markets that we operate in. So, there is more price sensitivity now because it's a very, very expensive market. So to the extent possible, people will shift to adjacent markets. And combined, it's not just price, but up until a quarter ago, occupancies in the Inland Empire were 99 point something percent. So people couldn't even get the space that they wanted. I think with the more normalized vacancy level, and we're still not at normal. I mean, normalized in my experience is 95% occupancy and that would have been great for the last 15 or 20 years. I think with more normalized occupancy, you'll see people and a resolution of the labor strike. I think you see a more normal pattern from which you can draw some conclusions.

Thank you. And our next question comes from Steve Sakwa with Evercore. Please state your question.

Yeah. Thanks. Hi, good morning. I guess, really kind of a two-parter. Just, Hamid, if you could just maybe talk about demand by size of tenant and knowing of whether you're seeing any real disparities in sort of the under 250 or under 100 and anything kind of on the bigger side? And then, just I guess your confidence level around the level of development starts. It's obviously a very back-end weighted sort of hockey stick figure for the second half of the year. So, how much of those projects are currently teed up? And what do you think that split of starts looks like between the third and the fourth quarters?

Yeah. Let me start on the development volume and then pitch it over to Dan for the other commentary. We do not care about development starts. We do not care about acquisition guidance. We make all these decisions one-by-one and only when it makes sense to pull the trigger on these. They're buying large already more or less, and we could, on a discretionary basis, start all of them today. But that would not be a wise thing to do, and we're not going to do it just to meet some artificial guidance. I think the main driver of earnings in this company, which is what we all care about, is rental growth and same-store growth. And all I can tell you is that with mid-60s mark-to-market, you can model whatever scenario you want, including zero rent growth from here on out. And for the next four years, five years, you're going to get same-store NOI increase of 7.5% with no rental growth from this point forward. You put in our normalized forecast for rental growth our best guess, and that same-store growth will be at 8.5%. Both of those numbers are consistent with low-double-digit earnings growth, while maintaining our leverage, which is so low. So, I don't - we don't need development starts to drive anything, and we're not going to get in a position of – or jeopardizing our pricing power by virtue of wanting to meet an artificial development goal. Now having said all that, we will start the ones that we think we can lease efficiently and economically and quickly. And the land is there. The approvals are there. And our ability to put buildings up is there. So, there is no benefit in front loading that stuff and pushing it ahead of where it needs to be. Dan, do you want to address the site question?

Yeah. Sure. So, we're seeing continued broad-based demand across all size ranges. Now there certainly are pockets of in certain markets that there's some risk and maybe the bulk. And those are markets we've talked about historically. South Dallas, North Fort Worth, Indianapolis is getting a fair amount of bulk built out. But, and then I would say West Phoenix, as well. But what I would say with our portfolio overall, we're really isolated from any of this bulk risk and we're really confident in the demand across all site ranges.

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

Thanks. Tom, turning to your capital deployment, $3 billion Blackstone deal at a 5.75 stabilized cap rate. Can you just discuss how you viewed the attractiveness of this deal versus some other opportunities that you might have had such as spot buybacks or development? Or do you simply think the value per square foot price shouldn't decrease much further from here on out?

Yeah. I mean, certainly, portfolios that we would acquire would be at a discount to replacement cost. And replacement costs have moved up tremendously in the last couple of years by virtue of - forget about the land piece, because that's a squishy piece that's related to rent and all that. But the construction piece has really, really escalated. So to buy standing inventory in our best markets is always a really great thing that we look at. The quality of the portfolio was quite high, I would say very close to our own portfolio. The percentage that we would dispose of is zero. So it was hand-selected to meet our requirements. I wouldn't call it a steal. We didn't steal anything. I think it's a market rate transaction and with the upside built into the rents, you know, 8% IRR in a world that I think is going to be a sub-3% inflation rate. And then, all the added things we can put on top of it and with Essentials and all that, I've developed capital at those rates all day long.

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

Good morning. Thanks a lot for taking my question. The lease percentage of the development pipeline has been dropping pretty materially, kind of back to 2019 levels. What are the factors there? And does this impact your ability to hit your yields expected on these developments?

Yeah, I think maybe the best way I’ll summarize in this call would be, we are back to 2019. Okay. We are getting at it in 25 different ways. But the easiest way to think about it is, demand, supply, rental growth, all of those things that are trending back to 2019 pre-COVID. And if you take ‘20 to ‘22 out of the picture and imagine, that in 2019, somebody would tell you that in 2023, you are still talking about the dynamics of the 2019 market, I would be jumping up and down happy about that. So, that’s where we are and almost to any question, I am not trying to avoid your question. But it would be the same answer on 20 other parameters, as well. We're back to 2019.

Our next question comes from Nick Thillman with Baird. Please state your question.

Hey, good morning. Hamid, kind of touched on you guys competing on price by 20% of tenants not renewing because of that. But retention is dropping down to 70%. So, are those tenants are renewing or do they not? Where do they end up going? Do they go to a new supply or a new product that's being delivered? Or is it more sort of a scenario where they're just completely priced out of the market?

No. They go somewhere else. I mean, those are real needs and at the end of the day, warehouse rent is - as a percentage of total logistic cost is relatively small. So they are not going to go out of business because of that. I mean, frankly, the pressure on energy prices, on fuel prices, on labor prices and all that, if you are going to worry about something those are more significant than their ability to pay rent. 70% is not an unusually low retention rate. I mean, if you, again forget about the last three years where there was no space and people had no choice, that would be a very normal rate of retention for us, going back and looking at it over a 10, 20 year timeframe. So, and we are trying to find out what the efficient point is for losing customers because of price. We can make that number be zero, but that would not be wise because that means we're not pushing rents as hard. So, 20% is definitely still below where I would start worrying about dial and get the other way. If it got to about 30%, we may want to moderate on that. But still, generally speaking, the bias is towards pushing rents and not occupancies. Now, markets where that is not the case, we’ll dial it back some. But that's a decision we make day-to-day based on the data that we see. It’s not a top-down type of decision.

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

Hey. Just a couple quick ones. Just going back to the market rent growth forecast and also Southern California, can you give us some context in terms of what was the first half growth on the market rent growth? Number one. And then, number two, when you talk about sort of Southern California, decelerating, is there a way to get some context on – is it just a deceleration or should we be bracing for things to potentially turn negative in that market?

So, couple things. First of all, the most important thing about Southern California is the gas in the tank. Not rental growth going forward. I mean the gas in the tank in Southern California is – I don’t know the exact number, but it’s probably over 100% on your average lease. So, whether you think rents are going to grow 3% or negative 3% or 10% or whatever, it's not going to affect that number one iota. Are there markets in Southern California and elsewhere where you could see rental growth sliding? Sure, of course, there are. When something has escalated by 150%, I wouldn't be surprised if it backslid some. Do I worry about Southern California becoming a difficult market? No. I would like to have more Southern California, because that means we have more cars with more gas in the tank. So, there's some markets that may continue to escalate, but they're still not going to be as good as a market that has embedded growth of well over 100%. So I'm not trying to duck your question. But we're a global company, it's a 1.2 billion square foot portfolio, and I think it would not be a productive use of my time or anybody else's time to drill down into sub-markets or individual rents. Because frankly, we don't spend a lot of time ourselves looking at that. We look at it bottoms-up, deal-by-deal. And then, we make our long-term investment decisions based on some macro bets. And what I'm telling you is that we like Southern California because of its embedded mark-to-market.

Our next question comes from Michael Carroll with RBC Capital Markets. Please state your question.

Yes. Thanks. I guess just direct it to Tim. I believe last quarter that you indicated the 2024 lease expirations had an 85 plus percent mark-to-market. I mean, can you touch on what is included in that estimate? Does that reflects expected market rent growth in 2023? And if so, does that 85% target in stats still hold today?

We would be in the 80s. Let me put it that way right now, and that would contemplate market rent growth from here. So, we feel good about still hitting that kind of number, but we will give full guidance on it later in the year.

Yeah, I don't think we know anything that suggests a different number than when we told you before. So it's essentially the same number.

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

Good morning. So, to clarify on Hamid’s comments around the portfolio's embedded NOI growth, if rents grew another 5% as you're projecting in the back half of this year, are you expecting core NOI growth to be tracking above that 7% mentioned or more closely to the growth you're projecting this year? And Tim, from your opening remarks, it sounds like market rents have grown in line with expectations to date but moderated into 2Q. Can you just comment on how the pace of growth looks like for the remainder of the year based on your teams’ projections?

Well, I'll take the first one. I think I want to be sure we're not conflating a couple things on same-store. So Hamid’s illustration earlier was about a four-year horizon what we think will unfold in terms of market rent growth. That would be that roughly 8.5% coverage. And I'll go.

But the average same-store NOI growth, not the rent growth, same-store NOI growth.

Sorry.

I don't even have the number for rent growth because frankly, I don't really spend a lot of - that's a very volatile number.

Yeah. So, and that number by the way incidentally incorporates what will happen in due course of its fair value lease adjustments and what we think will happen in occupancy. So, that's kind of fully baked and that's a four-year discussion. In terms of this year, there's going to be very little that could change in any direction on market rents that would affect this year's same-store growth. Just too much of the lease mark-to-market and the year, frankly, are now baked that we're going to land pretty tightly in the range that I…

For next years.

And then as it relates to the rent growth detailed, Tim’s script included a way for you to kind of reconcile that. And I think within the numbers, the main thing to know is, many it's both in the US and globally continued to have really healthy pricing power and meaningful moves in market rents, but the aggregate number is adjusted downward based on the disease on Southern California that we've discussed here.

Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

Thank you. Just a follow-up on the $3 billion acquisition you made. How much of that did it contribute to your full-year guidance raise, if at all? And can you comment on the pricing just given, 4% going in cap rate, not many buyers have Prologis' use cost of capital. So I was wondering how you came to that level and how many competing bids or buyers there were at that level?

Yeah, I'll pick up on the earning side. It's about a $0.05 roughly of our raise would be attributable to that. The remainder would be the same-store component.

Yeah. And on the number of competing buyers and all that, we don't know, but we actually work collaboratively with the seller to pick a portfolio that makes sense for them and makes sense for us. So it wasn't like there was a package and a competitive environment. But look, I would argue that two of the largest players in this space kind of know what's going on in the market and they don't need to know a lot of third-party validation of where pricing is. And we came to an agreement reasonably quickly on that. So, we're really pleased about it because we don't have to go through the brain damage of cleaning up the portfolio. We bought what we wanted to buy at the price that we wanted to buy and presumably they got the price that they wanted. And everybody was very happy about that, and we'd love to do more of that.

The next question comes from Nicholas Yulico with Scotiabank. Please state your question.

Thanks. Just a question in terms of what you're seeing with activity in the 3PL space. I mean, some commentary we were specifically about, LA and 3PL was that it was a market very tight to tenants took as much spaces as they could get. In many cases, took some excess space in recent years. And now that those same tenants in some cases are putting sublease space on the markers, and then you also have less demand from the user group. Maybe it's a port issue in the near term. But I guess I'm just wondering, broadly on 3PL what the activity of that tenant base looks like in across your portfolio?

Yeah, I'm going to make a general comment, and it applies maybe a bit more to 3PLs, but it applies to everybody. Southern California is a market where embedded mark-to-market is well over 100%. The 3PL business is a very low margin business, very thin margin business. If you've taken ten percent more space than you would have needed and now with the changed outlook you think you need 10% less than you needed before, that's a 20% swing in how much space you're going to need over the longer term. If you can make three or four times what you would make at a year - in a year, moving boxes around by subleasing that space, you would do that. So, the propensity to adjust your space to your needs is much greater in this cycle because of this significant mark-to-market that's in better than some of these leases. Now, if you're in a market where - and I can't think of a market like that. But let's say you were in a market where you're essentially a market or 10% below, by the time you pay a leasing commission and incur the downtime and maybe put some TI's in the space, you're not going to make money on that space. So it's more of a cost avoidance, and therefore not much of that happens. Southern California is actually viewed as a source of profit for these guys to sublease their real estate. So they're going to do it much quicker than before, and that's in fact what we’ve seen. So, it all goes back to having less than 1% vacancy in this market not too long ago. So, look, Southern California has been a crazy rent growth market for the for as long as I remember, whether you look at 30 years or five years or three years, but the last three years have just been ridiculous. And for anybody to think that that would continue forever, I - we certainly don't make our investment decisions based on that, and we don't operate our portfolio like that. So, we're not surprised about what's going on in Southern California.

Our next question comes from Vikram Malhotra with Mizuho. Please state your question.

Thanks for taking the question. There are two questions. One, just looking at the lease proposal chart, correct me if I'm wrong, I think this is all in square feet, and I'm just wondering how this would compare, whether you look at it as a percent of expirations or the portfolio just because you're a much bigger portfolio today with Duke in there and other acquisitions. So as a percent of the portfolio is there something unique in terms of the trend downward, it would seem as a percentage it's probably much lower. So if you clarify that number one. And then, just number two, bigger picture, Hamid, if you're talking about normalization in trends to still healthy levels, but that's just in normalizing to 2019. Where do you think the risk premium should be for public-private warehouse space? Should it be higher? Is it fair as it is today? Thanks.

Yeah, let me start with that. In 2009, there was a big difference between now and 2019. 2019, I don’t remember the exact number, but I think vacancy rates were north of 5%, maybe even north of 6%. Today and the outlook in 2019 was that we had a long run of improving market conditions and I think as calls like this, we are all worrying about for the sixth year in a row, whether supply would exceed demand. Okay? That today - it's a same market except the vacancy rates are substantially lower than they were at that time. And we have less of a concern about supply beyond this year than we had in 2019. So, it's a slightly different market but the dynamics are not that unusual. With respect to public to private, I continue to believe that - I don't know about the sector, but I continue to believe that we trade at a modest discount to NAV and private values. And I think once capital flows start up again, once the denominator effect starts going the other way because of improvements in public markets, I think that will be validated. So, I do think private values in general are slightly higher than public values where these companies are priced. And then Vikram, on the proposal volumes, yes, as square footage and as to reconciling it I'd point you to the answer earlier to the same question and happy to go through it offline if that's not sufficient for you.

Thank you. And our next question comes from Todd Thomas with KeyBanc Capital Markets. Please state your question.

Hi, thanks. Just the number one on market rent growth. You've previously talked about a 300 to 500 basis points spread in market rent growth between coastal and non-coastal markets. In light of your comments around Southern California, can you just talk about how you expect that spread to trend as you look ahead to 2024? And are there other coastal markets that you would include in the discussion with Southern California as you think about the labor strikes and the impact that that's having at the ports?

Yeah, I want to be clear about what we said. If you look at all the markets that we operate in, Southern California is going to have the highest rent growth of all, not market rent growth, maybe the market rent growth will modulate, but because of the mark-to-market Southern California for the foreseeable future. And by that, I mean five years plus is going to have the highest growth rate of any market that I can think of five.

Yes, 100%.

Yeah, and that can go on literally for five to ten years. So, because the mark-to-market is so huge. Now, in terms of market rent growth, I don't know, we'll find out, but it's our view has moderated. But that really doesn't matter. It's kind of like adding 2% to 3% in one direction or the other to a number that's north of 100% percent. So I think we're focusing on the wrong issues. I don't really know the answer to your question. If I did, I’d tell you.

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

Hi, good morning. Just a question on contributions. It looks like you restarted in this quarter with Japan and Mexico. Is there still a plan to restart contributions in the US or Europe later this year? And how they're progressing overall?

Yeah, I’ll start it and pitch it over to Chris then. Look, the reason we stopped contribution is not because we didn't have the capacity to buy these assets in our funds, we did because they're very low leveraged. The reason we did is that we couldn't really look our investors in the eyes and say that we all have clarity around the values for the fund, for the properties that are being contributed. So we're not in a rush to do that. There were some companies that forced these decisions back in the last cycle that that - and we didn't, and we fared much better than those companies that forced the contributions. So as long as there is clarity on valuations, we will contribute assets at least we would be willing to contribute assets. But I remind all of you, at the end of the day, the independent advisory board for each fund makes a decision of whether they want to accept those contributions or not. It's not a must put, must take kind of a situation at all. So, but we couldn't very much look them in the eyes and say that this is the value because there was uncertainty around it. In the markets that you mentioned, there is clarity around the values. Europe, we felt that it reached a point of clarity at the end of last quarter and we believe the U.S. is becoming very clear too. And the whole process took about three quarters from the downturn, which is what we expected this to say based on experience. So you should expect contributions to continue at the sort of a normal or maybe somewhat modulated pace.

Our next question comes from Michael Mueller with JP Morgan. Please go ahead.

Okay. Thanks. I guess following up on that contribution question, are you seeing any traction yet in the third quarter with dispositions?

We are not trying to dispose of a whole lot because remember, we're almost through all the Liberty ones and Duke had very little dispositions associated with. We sold a couple of them of late and the latest Blackstone portfolio has zero dispositions in it. So, I mean, other than the normal sort of Bluebird dispositions, we're kind of reaching the end of cleaning up the portfolio. There are a few deals here and there, but then what would you add to that?

I would say the transaction market is opening up, and we're very confident. We're going to be able to dispose of what we want when we want.

But it's not a material amount. It’s not going to move the need on our company.

Next question comes from Craig Mailman with Citi. Please state your question.

Thanks actually, Nick Joseph here with Craig. Just going back to the comment you made earlier on the Blackstone portfolio deal you said you worked with the seller, kind of what would work for both sides and obviously there are a lot clearly there was a lot to choose from. So, what were you focused on, is there from a portfolio or strategic perspective in terms of the assets you’ve acquired?

Well, the markets that we like in the long term. And I can tell you that during the course of that analysis and that thinking, what the market rent is going to do in the next six months to the last decimal point was not a consideration. I mean, it’s - those are markets that we really believe based on daily interactions with customers as to where demand is going to be where we see that trends in supply which are, by the way let’s, we haven't talked about that in a couple of quarters. But Supply is becoming extremely difficult to bring online in places like California. In fact, I'm kind of worried about it because some of these places are shutting down. I mean, we spent a lot of time with the legislature trying to defeat A B 1,000 which was a proposal to basically stop all warehouse development in Southern California. So, in selecting those assets, we focused on the markets that we liked a lot, and we were prepared to accept a lower yield for those markets because they have more embedded growth.

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

Thank you and thanks for taking my question. So, I want to get your thoughts on just the different regions coming out of what should be a recession if we get a recession. There's a lot of talk about European wages really lagging the U.S. obviously, that's a big driver of retail spending in your business. Can you just talk about what might be different as you think about putting capital to work across Europe, Asia, and the US or North America given what, might some of these macro trends we're seeing?

Yeah. U.S. has got the highest rent growth over time of any of these markets because it's a more dynamic economy, bigger GDP growth I think than Europe certainly. But Europe has always been a sort of more muted market in terms of supply. Vacancy rates are always lower in Europe and land is metered out by usually government authorities. It’s not so much of a free market. You go buy from the former land. So, it's a more muted growth pattern than the US one. But we mitigate that because we employ more of a fund structure in Europe. So the combination of the earnings on the fund management business plus the growth in the underlying real estate business makes up for the difference. Asia, China used to be a powerhouse in terms of economic growth. It frankly has surprised everybody coming out of it with respect to how slow it's been to turnaround. I'm not smart enough to know whether that's a long-term trend or a short-term trend. But that market has gone from basically 10% per year type of GDP growth to more like a 5% rate of growth. Japan, probably the best long-term market for us, from a development point of view has always had low rent growth. 1% to 2% rent growth would be great. But boy!! there's no CapEx. There's no turnover. There is, - and yields have maintained themselves in Japan, better than anywhere else. There's been no cap rate expansion in Japan at all. And remember, there's hardly any mark-to-market. So there is no cap rate expansion. And in fact, I would say there's probably 10, 15 basis points of compression in the last 12 months. So it's a good development market and from an operating point of view, we talk cap rates. But at the end of the day, the cash flows in Japan are very strong. There's very little of it leaks out to CapEx and other things. So, each market is different and each market when you look at it as a portfolio plays its role within our overall business.

Thank you. And our final question for today comes from Camille Bonnel with Bank of America. Please state your question.

Hi, thanks for taking my question. Does the valuation of your USLF fund take into account the recent portfolio acquisition you announced or is that more of a comp for next quarter?

Good question, Camille. I don't know. We bought that portfolio on balance sheet. So it's not a fund investment, so. But I honestly don't know how long it's going to take the appraisers to reflect that. But it's - we bought it at the very consistent level of valuation to what we thought valuations would be this quarter. And I think we were right about that. So I think the market has adjusted in terms of understanding where values are going, I think we're at the tail end of those adjustments. You were the last question, Camille. So thank you all for your interest in the company. We certainly feel very good about our business going forward. And hope that we will have the opportunity to speak to you more over the summer. Thank you, everyone.

Thank you. And that concludes today's conference of parties. All parties may disconnect. Have a good day.