Welcome to the Prologis Third Quarter Earnings Conference Call. My name is Christine and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Tracy Ward. You may begin.

Thanks, Christine, and good morning, everyone. Welcome to our third quarter 2017 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we’ll hear from Hamid Moghadam, our Chairman and CEO, who will comment on the Company’s strategy and outlook; and Tom Olinger, our CFO will cover results and guidance. Also, joining us for today’s call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly, Diana Scott and Chris Caton. Before we begin our prepared remarks, I’d like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry, in which Prologis operates, as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our third 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. With that, I’ll turn the call over to Hamid, and we’ll get started.

Thanks, Tracy, and good morning everyone. I would like to begin with a few comments on the operating environment. In the U.S. market conditions remain excellent. Consumption has been growing at a faster pace than available stock, leading to vary tight market conditions. At the beginning of the year, we highlighted an elevated level of development starts which will show up in higher deliveries over the next few months. However, new starts moderated in the second and third quarters, leading to development volumes that fell short of demand. This shortfall is further boosting market rent growth across our U.S. portfolio. For the first time in my career, net absorption is being constrained by a serious shortage of space. Tight land and labor markets are acting as governors on new construction. We are hearing consistent feedback from our customers to tell us that they are operating at capacity and that is difficult for them to find additional quality space in the right locations. These favorable conditions have elevated the mark-to-market in our portfolio. In-place rents in the U.S. are now 18% below market, expanding our organic growth for a long period into the future. A similar dynamic is playing out in continental Europe which is likely U.S. by more than four years in this cycle. Construction costs are escalating rapidly, driven largely by labor which is making new development more difficult to pencil. Market rent growth has been muted over the last several years largely due to the massive headwind from cap rate compression as well as on even demand. As you will recall, we anticipated this cap rate compression and invested heavily in the region between 2011 and 2014. Two recent portfolio transactions in the market point to the significant value uplifting Europe. Going forward, rental rates will be driven…

Thanks, Hamid. I'll cover the highlights for the quarter and provide updated 2017 guidance. We had another great quarter with core FFO of $0.67 per share. Operating condition in our market continued to be excellent and our results reflect our customers intensifying need for well located logistics facilities. In this environment, we continue to push rents versus occupancy to maximize overall lease economics. Our results reflect the success of this strategy. Our share of net effective rent change on rollover was 22.7%, led by the U.S. with a record 31.9%. This marks the seventh consecutive quarter of U.S. rent change above 20%. Global occupancy at quarter end was 96.3%, an increase of 10 basis points sequentially, but 30 basis points lower year-over-year. Our share of net effective same-store NOI growth was 4.1% with U.S. leading the way at 6%. I want to point out that we had a 20 basis points drag from Brazil in our same-store results due to the acquisition of our partner's interest in the lower occupancy levels in their portfolio. The third quarter is the first time this cycle our same-store growth was driven exclusively by releasing spreads and not by occupancy gains, which have been a meaningful contributor for several years running. For a reference, we had a 100 basis points of occupancy pick up in our second quarter same-store results with no such benefit this quarter. Given further market rent growth and the cumulative effect of rent change, same-store will accelerate into the fourth quarter. In addition the spread between market rents and our in-place leases widened again this quarter and is now 14% globally and 18% in the U.S. This further build up our embedded earnings potential and lengthens our runway for NOI growth. Moving to capital deployment for the quarter, margins on…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Craig Mailman from KeyBanc. Please go ahead.

Maybe on the development starts. I know you said build-to-suit was 50% of the increase and maybe just give a little bit of color of how much you are pulling forward from what you thought you would start in 2018, and maybe a little bit on which geographies are driving the ramp here? And then maybe also second Tom, just on the timing differential on dispositions and redeployment, is there any way if you give us sort of a sense on FFO in terms of pennies, kind of as we think about transitioning from 4Q to 1Q '18 run rates?

This is Mike Curless, when I hit kind of the geographic distribution on the first part of your question. The way we see it shaking out this year is approximately 45% in the Americas, 25% Europe and 30% in Asia, which is pretty typical over the last couple of years and we are seeing good solid demand in all three of those geographic segments.

Yes, and in terms of going forward from next year, we are not going to get into providing guidance, but I think you should expect us to be doing a similar volume to the range that we have indicated for the long term next year as well. So I don’t think there is any pulling in going on here.

And then Craig as far as your question around the drag, in my prepared remarks I talked about the increase in our development pipeline based on our starts and this guidance we would be up about 600 million year-over-year. So if you think about that 600 million and you think about yield on that you are looking really at $0.4 to $0.5 impact from that on a year-over-year basis.

Thank you. Our next question comes from Jeremy Metz from BMO Capital Markets. Please go ahead.

Hamid, as we sit here today, you mentioned the portfolio was about 14% global mark-to-market and the U.S. is around 18. So when you think about closing that gap and getting to -- as you think about closing that gap, you know, how many more years runway do you think this is going to provide us if market rents were flat from here? And as we go down 2018, not looking for guidance, but as we thinking about 2018 rent expirations, how do they compare to that? Is there more room in '18 and then maybe slows the difference there? Or is there a bit less in 18 in the mark-to-market opportunity accelerates from there? Thanks.

Sure, every time I answered that question I find myself coming back day year or later and basically giving you the same answer because the rent growth has last couple of years exceeded our expectations. So the runway, the mark-to-market is getting extended. You may remember that couple of quarters ago maybe a year ago, we had a 12% mark-to-market. We have burnt through a lot of those early lower leases, yet our mark-to-market is now high. So it just seems like we are chasing really incredible rental growth and we have been conservative, certainly in last couple of years. And surely that will change at some point although I don’t think it's changing again soon. So, we would have said '18, '19 is the year probably now we'd say '20, '21 is the year because even if rent growth flattened out, and it's not going to go from 9% so far this year in the U.S. and Europe, I mean will gradually moderate. You can see multiple years of 4% or 5% same-store NOI growth. And then the great news about our portfolio is that that's just the time that the Europe is really coming through in a big way. So I think absent the calamity, I think you can kind of count on many-many years of strong same-store growth going forward. I don't think this is one of those things that -- I think people pay entirely too much attention to quarter-by-quarter trends as opposed to sort of longer term trend. And the longer term trends have been remarkable. I mean far in excess of our expectations.

I'll give you a little color on same-store. So some things to think about as we mentioned, this is the first quarter where we had no occupancy pick up in our same-store pool. So from here on out, you should think about same-store being driven almost exclusively by rent change on roll and not by occupancy. We think occupancy levels are pushing rents as you know, so occupancy levels don't see any upside from here at all. So now you got to think about what rent change is, and if you really need to think about rent change on a rolling fourth quarter basis because that's what impacts your same-store flow. And when you look at trailing rent change for the last four quarters, Q3 '17 was the first quarter that's above 20%, it's about 20.7% rolling four quarters. And when you think about what that number is going to do going forward, that number is going to grow. I would expect that number to consistently be in the 20% range all next year. And if you look at just the component, our rent change in Q4 2016 by itself was 16%. So we're going to drop off at 16% rent change quarter, we're going to have something in the fourth quarter that's got a 20 in front of it. So I think the trend is -- the rent change on roll is only going to increase. When you look at roll for 2018, I don't think there's anything you need in 2018 versus '17 with the exception of roll is going to be a little lower.

Thank you. Our next comes from Manny Korchman from Citi. Please go ahead.

Maybe, Hamid, as we look at sort of that growth and your accelerating development pipeline. How do you think about sourcing land? And has your approach to either where the land is or the type of land you're buying changed?

Not really. It's -- buying the land is getting more and more difficult because the buildings are getting bigger, which means the land requirements are getting bigger and also coverage is getting lower by the way. So the pieces of flat land that you need in these major metro areas where we're active is getting really hard to come by. So -- and we're fortunate to have fair amount of land on the balance sheet and so I think the opportunity is pretty good for us for the next couple of years, but I'm going to tell you sourcing land is one of the most difficult things in our business. There's plenty of land and it's just good land that, that's hard to source. And as about things are getting very difficult with respect to approvals and exactions and cost for services and everything, and then in some jurisdictions, the unions are getting very tough and construction costs are getting more and more difficult. So I would say land generally just becoming a more difficult topic.

Thank you. Our next question comes from Jamie Feldman from Bank of America. Please go ahead.

I guess thinking about the consolidation of the funds business, your investment this year is kind of doubling down in Brazil. Can you just give us your thoughts on the global landscape? Where you think the best opportunities are? And what we might expect to see, I know you're not giving guidance for '18, but just as you guys look ahead to '18, how much large scale investment activity might we expect to see and how much consolidation activity?

Yes, we're not planning on any of it, Jamie, because we tend to be opportunistic. And it looked the lot of big portfolios have transacted in the last couple of years that we've not participated in. We've been in every one of those. We've looked at every one of those. We've evaluated them, but we've been pretty disappointed in our pricing. And frankly, our proprietary deal flow in our funds and all that has been better than external deal opportunity, so that's where we've chosen our capital dollars that and development. Going forward, we're just going to have to see what the opportunities are. We do not as I said many many times, when it comes time to giving guidance and people say what's your acquisition guidance for next year, and I say zero to 10 million. And we've exceeded the 10 million in one year actually. So, it's not something that we budget or predict because it depends on pricing. We can make it be whatever we want to be, but that's if we're not disciplined the various price which we are. So we're just going to have to wait and see. Qualitatively, I would tell you that more of our acquisition activity is likely to be value added where because of our customer franchise and our development expertise, redevelopment expertise et cetera. We can create a lot of value. Good example of that would be for example this building that we recently built in the Bronx. So where you can see us expect us to do a lot more of those kinds of transactions, but going out and getting into a war on declining IRRs rates to zero on cap rates, that's kind of not our deal. We got to have some kind of a competitive advantage.

Thank you. Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead.

Thanks, good morning. I mean I guess to follow up on your comments about you know kind of the slower pace of leasing being a function of how well occupied you are and tenants operating that kind of full capacity. Are you sort of changing your thought process on development and kind of the mix between the build-to-suits and the spec? Just given maybe the opportunities that are out there and how do you sort of think about that going forward?

Steve, I don't think the pace of leasing is slowing down. I think absorption is slowing down because there isn't much space to lease. So I think the -- I guess I would say the interest and the desire on the part of tenants to lease space is as high as it’s ever been. It's just not translating into as much absorption because they can't find the space that they need. And we're hearing that time and time again, we had our customer advisory board meeting about a month and a half ago in Atlanta. And the uniform message was, guys, we never thought we would say this, but we don't kind of care a lot about price, we just lease the space because our business really needs to grow. We've never heard that before from customers and we're hearing it from multiple customers at the same time. In terms of the implications of that for a development business, I would say at the margin the thing that's going to surprise is the volume of build-to-suit. And the volume of build-to-suit is because people can't find that readily available spec space that they can go a lease, and we’ve been able to de-risk build-to-suit at very significant margin. So, if there's a surprise anywhere in this is that our normal 25% build-to-suit is now 50% and that's translating into incremental volume. The 50% spec that we were kind of doing is the same number overtime. It's the build-to-suit that are way up.

Thank you. Our next question comes from Blaine Heck from Wells Fargo. Please go ahead.

Hamid or maybe Gary, can you guys talk a little bit more about operations in Europe? Occupancy slipped 80 basis points sequentially, but I'm wondering if that's because you guys are actually pushing more on rents. So if you can give any color around that and maybe what were your rents spreads in Europe during the quarter that'd be helpful?

Yes, so it's Gary. The occupancy drop, I wouldn’t get too worried about the drop to 80 basis points in the quarter down to I think 95.4%. There was no real single driver. We had a handful of fairly large recent rollovers in the UK, France, Belgium and Poland. But I wouldn't dig anything into that. In fact, I would expect occupancy to kick up next quarter. In terms of rents, the thing that has held rents back in Europe is the significant capital compression that Hamid talked about in his opening remarks. But if you look at our trailing four quarters or even five quarters for both rent change and same store NOI, both have an upward arrow. And I think that should be indicative of how we were thinking about that market going forward.

Yes, Mike. Just to reinforce what Gary is saying. The cap rate compression in Europe has just been incredible. And we've created a lot of NAV, maybe not quite the same rent growth as the U.S. But certainly more NAV, there has been more cap rate compression in Europe in the last two years than there has been in U.S. by a factor of three. So we're getting it in NAV, we might not be getting it quite in rent growth. But NAVs can go down to -- I mean cap rates can go down to a certain level, and then at that point they're going to stop and it's going to translate into rental growth.

Thank you. Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead.

Can you provide us some color on the supply outlook? What happened that drove the activity to pick up in the 1Q? And why this drop-off in 2Q and 3Q? What's limiting this activity, especially given the rent trends and your comments that tenants are less worried about the price today?

I don't think it was anything conscious. I think it was just quirk and you had a bunch of starts at the beginning of year. Maybe it was weather related. I don't have the good theory on that. But all I can tell you is that facts are we have the high level starts in the first quarter, and it petered out in the second and third quarter. So supply is pretty tight. And, you know, there is a lot of discussion about when is supply going to finally exceed demand. And we've been torturing ourselves for the last two years trying to get that number. The numbers are between 220 and 225 one way or another kind of in that order of magnitude that's what we see going forward. Whether supply and demand are $5 million pretty short or $5 million to be too much doesn't matter, vacancy rates are under 5%. There is ample pricing power. And frankly I think there is pricing power of up to 6% to 7% of vacancy. Some of these markets are 2% vacant. So I think we should watch the absolute level of supply and demand, how they relatively compare to one another on the margin when the differences are so minute, I think -- I don't think it's as instructive.

Thank you. Our next question comes from Dave Baird from Baird. Please go ahead.

Hamid and Tom, you've talked about I think the three major capital sources for your businesses internally, non-core asset sales, development contributions and fund rebalancing. Can you talk about how the capital that's chasing your business or looking to partner with you today, helps you rank each of those three, just trying to get a sense of? Are we seeing any meaningful shifts in capital where it might make sense to pursue one versus the other? And a clarification time that you say same store NOI would accelerate into the fourth quarter or just the rent change on rollover? Thanks.

I'll take the last piece first. Same store NOI growth will accelerate from Q3 to Q4 level.

So I would say a lot of our -- the way we approach the business is that we have a business to run, that’s a first set of decisions we make. Where do we want to develop? Where do we want to acquire? How do we well serve our customers? That’s where it all starts. We don’t go talking to the investors to figure out, what -- how much we need capital. We talk to our customers. And that’s what drives the opportunities. Then we go look around and see where the best place of funding in it. So, obviously, we have idle cash that’s earnings nothing on the balance sheet, that’s just good place for it to go because in effect, the opportunity across that capital is the lowest. And frankly we have been in that most of the time, that’s why all the development is taking place on balance sheet essentially, 85% of the development is placed on the balance sheet. Because combined with the low opportunity cost to that capital immediately there is also a land which we are beyond. So the return on the incremental investment which is just to building is really high. So the first order of investment priority for us is to put our land to work with incremental capital from the balance sheet and development. And then we have these vehicles established which set our strategy for the long-term ownership of these assets. And that’s where these assets end up. So we need to capitalize those vehicles in usually the private market in the case of Mexico and Japan actually from the public market in those places. But then we go find to capital for doing that. The rebalancing of our interest in the ventures is a really good way for us to deploy capital when we have excess capital. When you see us having excess capital like right now, that’s when you see investments and our ventures being 30% or 28% or whatever high percentage. Our real long-term strategic objective is to be around 15% in those vehicles. So, there is a lot of excess capital in those ventures today that in the long-term will come down. And by the way, our investors are totally fine with that because even 15% of capital in 9 by then $10 billion to $12 billion capitals, couple of billion dollars capital. So nobody is worried about or not being focused on this. So that’s how we approach the business, starts with customers, starts with the opportunity cost to capital, and then we need to find permanent homes for these assets that are creative, and that’s where we go to our strategic capital.

Our next question comes from John Guinee from Stifel. Please go ahead.

Just a comment, Hamid, it seems like a long-time since you are rationalizing and getting a lot of pushback on the KTR deal. Congratulations. Couple of things, one is the we noticed that the debt plus preferred stock went down about 900 million quarter-over-quarter combined with cash on hand up by 300 million. If you could talk about what major transaction drove that unusual combination? And then second, looks like your net earnings for 2017 is about $3 a share and I understand that’s not taxable earnings. Can you talk about dividend pressure? I think the dividend is about $1.76 a share right now.

John, let me start by thanking you for making that comment about KTR. I really appreciate it, but let me turn that heavy lifting on your question to Tom.

So, on the debt drop, it's largely attributable to the NAIF transaction into USLF. So, we transferred debt in there as well. So you have to look at the transaction by its components. So that was the main driver of the decline in debt. And plus, we did generate significant proceeds during the quarter primarily through the Japan contribution, so that was also used to reduce leverage. Regarding the dividend, I don't foresee any need for a special dividend in 2017, but I would tell you we're sort of at the limit of paying out the -- covering our taxable income. So, I would think we're going to see dividend increases going forward, somewhere between that base level of -- to cover the TI up to what our AFFO growth is.

John, I can't tell you how stressed he looks when he says all of that.

Thank you. Our next question comes from Eric Frankel from Green Street Advisor. Please go ahead.

First, I want to thank your team again for hosting that investor tour in Europe. Last week, it was quite informative, so thank you for that. Second just related to global trade, which has obviously been a traditional driver of your business. Any comments on the NAFTA discussions that are taking place? It doesn't seem to be going all that well. I think the U.S. seems to be -- I think there seems to be little bit higher odds that the U.S. is going to back out of the trade agreement. So any thoughts that you can share or what your customers are thinking would be appreciated?

We'll let Chris Caton cover that one because it's in the realm of speculation.

Eric, thanks for the question. Yes, indeed, there seems to be a bit more news and noise on NAFTA lately. And it seems as if to regard to pace and tenure of those negotiations and it's something suggest new risk to the agreement. But I also think it's symptomatic of a change in how the U.S. negotiates agreements. And so look on NAFTA, I think we'll continue to see that noise. The U.S. may initiate a withdrawal, which is a six month window to continue discussions. And indeed, the discussions are slated to continue into next year anyway, but regardless of direction on NAFTA, more important is its implications for our business.

Eric, it's Gene. Just to on that note, we have not seen any fall off in demand, and if anything and you can look at the fundamentals in Mexico as easy as weekend, that market has been strengthening. And recently -- look, if we go back a year and a half, the NAFTA dialogue has gone one direction to other direction, does have an effect on currency which we pay attention to. But during that entire period of time actually demand has probably grown slightly and the conditions right now in Mexico are actually pretty good.

And the only thing I have to add to what Chris said is that it makes it sounds like U.S. has a very clear and deliberate strategy which at least judging by everything else that we've done off late. I don't see quite that level of sophistication in that strategy, but that's more commentary than fact.

Thank you. Our next question comes from Nick Stelzner from Morgan Stanley. Please go ahead.

Can you give us an update on your multi-storey warehouse initiatives in the U.S.? What's the demand and pricing been like across the different levels of the building and also relative to the other buildings in the area?

We've leased a multi-storey building that we acquired. The rent has been about 20% higher than our expectation, and probably between double and triple what quality space is in a traditional industrial location in the same metro area. Our Seattle building is too early, it's not going to be even completed until mid-to-late next year. We're having the dialogue on it, but we don't lease that prematurely. And the San Francisco project is not even approved yet, so it's early. Oh, the opportunity is, I don't know I think there are six markets for sure that can benefit from this type of development and it would not be unusual to think of those markets as sort of 5 million square foot opportunities in the next call it five years. And if you do the math that's 30 million feet, these buildings are about double to triple the price of traditional industrial. So it’s equivalent to roughly a 100 million square feet call it 60 to a 100 million square feet of regular industrial. So if you compare that to our U.S. portfolio, we've got 400 million feet. It's probably a 20%, 20-25% type growth opportunity if we can find the real estate and execute successfully. But that's speculation, so we'll take it a deal at a time in those six markets.

Thank you. Our next question comes from Eric Frankel from Green Street Advisors. Please go ahead.

Just one quick follow-up. Is there a specific market or geographic area where you're increasing dispositions to fund your additional development activity? Or is it just kind of the bottom rung of the portfolio, generally?

Yes, Eric, the answer to that question always is Tampa. Because we've sold out of Tampa three times and we keep getting back into it. No, I'm just joking. We're basically selling our other markets first, and we're pretty much done with that. And then we go to the regional markets, and the regional markets we only want to own the very top-tier product. So we're selling sort of the less high quality product in the regional market. And then in the core markets and the global markets that we're really interested in long-term, there is always some level of you know 2% to 5% pruning of the portfolio that goes on all the time in terms of upgrading the quality. So when you add up all those, it's a pretty significant number. I would say we're essentially done with our non-strategic sales in the U.S., essentially in the last $100 million to $200 million of that stuff. And Europe, we've got less than a 1 billion to go, so we are -- we sold $14 million of real estate since the merger, so we're really getting to the bottom of the barrel in terms of what's left. And there will be the regular calling of the portfolio that will go on every year even after that, and there're always some opportunistic sales that you know we get an outrageous offer or there's a build-to-suit that we do that we don't want to hold. So there will be some dispositions, but the volumes are likely to decline. Of course, if we buy a major portfolio or a company or something, there could be more dispositions in that, but I'm not aware of any of those things right now.

Thank you. Our next question comes from Vincent Chao from Deutsche Bank. Please go ahead.

Just a quick question on construction costs and maybe inclusive of land, but at this point I mean are you seeing construction cost growth faster than rent growth? And then second question just on demand, just any changes in the source of demand by tenant type or an industry in the past three to six months?

Yes, construction costs are driven by labor cost in a big way, pretty much everywhere around world. I would say given the 9% rental growth in the U.S. to-date, it would be hard to say that construction costs are growing faster than that, but they are -- there is 5% to 6% anyway and maybe a little bit higher U.S. In Europe, construction costs are going up a lot and they are going up faster than rent. So, I think development is getting tougher and tougher to pencil out, which I think is a really good for rental growth in Europe in the long-term. What was the second part of your question?

So in the U.S. in the recent quarter cyclical has picked up in a particular residential construction and related usage to that. And then of course the e-com related usage which in the transportation sector as well as packaging has also been strong during the quarter. And I think last quarter we highlighted that we saw a weakness ahead for auto related demand and we'll have some sort of temporary reversal of that with the at least a 1 million vehicles damaged these hurricanes.

And then in Europe, I'd say the monetization of the supply chain is obviously a big driver. One of the categories within that sector is consumer goods up 20% and up 20%, it was 20% a share this quarter. Interestingly, automotive was 12% this quarter. So, it continues to be pretty strong in terms of their modernizing the supply chain. For those of you that was -- were on the tour last week, you would note BMW and Jaguar Land Rover both preparing for electric cars and really alternative revenues. In JLR's case, you saw the classic car division and special vehicle unit. Within cyclical this quarter, home appliances were 18% share and they're across both of those two. Obviously, e-commerce continues to be a pretty significant driver and it was about 17%.

Thank you. Our next question comes from Jon Petersen from Jefferies. Please go ahead.

Thank you. Can you talk about the lack of labor as a limiter on supply? Hope you can provide a little more color on that. And where you think the longer term impacts are? But logically you think customers are going to have to increase wages to find people. Maybe that limits the ability to pay higher rents on warehouses, obviously things really tight and I'm not sure about that. Just trying to think more of what the longer term implications are there with the labor market?

Yes, there are two kinds of effects of the labor market. One is that the shortage of construction labor is really driving up construction cost. And therefore we're putting pressure on rents that you need to justify replacement cost. So that tends to push rents up. In terms of what customers are doing with respective to the operating the buildings and the shortage of labor, actually what we hear from them in the U.S. is that they really are having hard time finding customers that actually -- I mean employees that pass the drug test, which I hadn't thought about that. But apparently this opioid epidemic is quite a big factor in terms of hiring a warehouse labor. Anyway, I think what they're doing is they're improving working conditions, they're paying more to get labor, and they're introducing more automation, and because they have to so business isn't slowdown because of that. But remember there are a lot of things in the supply chain cost that are actually going down in terms of cost. The cost of energy is generally being going down that's transportation that's a big component of the supply chain cost. Interest rates are very low, so the cost of carrying an inventory is much lower than it used to be. A lot of retail real estate is being skipped over in terms of the supply chain through bricks-and-mortar jumping over to e-commerce. So, it’s a dynamic mix, some cost going up and some cost going down. But what we are hearing from our customers really for the first time in my career which is remarkable is that they are a lot less price sensitive on warehouse rent, which represents about 3% of their total supply chain cost, maybe 5% in some cases than they have appeared to be in the past. I mean they are openly telling us that. I have never heard that before.

Thank you. And your last question comes from Manny Korchman at Citi. Please go ahead.

Just looking at your supplemental here, it looks like to the occupancy with your -- the largest boxes in your portfolio dipped quarter-over-quarter. Was there anything specifically around there or might be a mix issue or something else going on?

This is Gene. There isn’t anything particular. And that segment as you probably follow, we have been extremely high levels of occupancy about 1 million footer goes dark, it makes the difference. So, I wouldn’t read anything into that.

Okay, thank you. That was the last question. We really appreciate your interest in the Company and look forward to seeing many of you in Dallas again, I guess, pretty soon. Take care.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.