Greetings. Welcome to Prologis Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to Jill R. Sawyer, Vice President of Investor Relations. Ms. Sawyer, you may now begin.

Thanks, Rob, and good morning, everyone. Welcome to our second 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 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. On July 13, we announced the merger between Prologis and Duke Realty. This call will focus on our second quarter results. The company will not provide comments related to this transaction beyond what is included in our prepared remarks. 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 thank you for joining our call. This morning, we reported our second quarter results, which were strong and ahead of our expectations with occupancy, leasing and rent change all at record highs. Duke also released their operating results this morning, which tell a similarly strong story. That said, the macroeconomic environment is making it difficult for investors to fully assess the state of our industry. There's frankly a stark difference between what one reads in headlines versus what is actually happening in our business. Accordingly, we find ourselves focusing more on our own proprietary metrics and real-time feedback from our customers to build a forward-looking view of our markets and demand. Before going through that view, let me first step through our results. Core FFO, with and without promotes, was $1.11 per share, slightly ahead of our forecast. Rent change on rollover was 46%, led by the US at 54%. Retention in the quarter was 79%, driving occupancy higher by 30 basis points over the quarter to 97.7%. All of this led to net effective same-store NOI growth of 7.6% and cash same-store of 8.2%. We started $1.7 billion in new development projects, bringing our year-to-date starts to $2.7 billion. On the balance sheet, we closed on a refinancing of our lines of credit, expanding the total commitment to $5.4 billion, ending the quarter with $5.2 billion of liquidity. We are very pleased to have not only increased our line capacity, but also to have done so while maintaining our spread and staggering maturities. In strategic capital, our net equity queue, which combines the committed queue less outstanding redemptions and deployment, it was $2.8 billion at the end of the quarter. While performance in the second quarter was strong, we recognize that with the…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question will be coming from the line of Michael Bilerman with Citi.

HI. It's actually Craig Mailman here with Michael. I just want to hit on the market rent growth and mark-to-market piece. You guys had 79% retention, 25-odd percent cash mark-to-market just peak average occupancy levels. And so I guess maybe a two-parter here. Just what breaks the camel's back here in the near-term from an occupancy or market rent growth perspective? And then two, maybe, Tim, could you just address as you head into the back half of the year and into 2023, kind of remind us what that mark-to-market on a standalone basis means for FFO per share?

Yes, I can take the second part. We actually really don't break the number down in that way. We have full year same-store guidance. As noted, with a midpoint of -- it's at 7.5% to -- yes, sorry, 7.5%. And the growth in the back half is probably adding $0.01 to $0.02 of the run rate that you'll see in Q3 and Q4.

Yes. And we didn't really hear -- I didn't really hear the first half of the question. Can you repeat that, please?

Sorry, I was just saying kind of given the strength of the operating metrics, what breaks the camel's back from the sense of risk to occupancy market rent growth is a mark-to-market here? I know you guys talked a lot about kind of the headline risk versus the reality of what you're seeing on the ground. But just to maybe put out there from your perspective, what the real risks are given what you're seeing on the ground?

Yes. So there is the much talked about risk to supply exceeding demand. And there's a fair amount of confusion between the supply and demand balance in the overall US industrial market and the markets that we are involved in. And I'll turn it over to Chris to actually walk you through that because that's a pretty important distinction, and I really don't think there is a risk to supply, particularly given the low vacancy rates from which we are operating today. But let's bookmark that, and Chris will talk about that. On the demand side, the way I think about it is that I've been doing this for 40 years. And I would say, prior to last quarter and the quarter before, let's call the peak in terms of strength of market on the demand side as a 10 on a one to 10 scale. I think the last quarter and the quarter before were like on 12 or 13. They were just crazy good. And I think this quarter, there may be 9.5 to 10. I mean by historical standards, this would be exceptionally good. I mean in the 5 percentile good for the last 40 years. It just -- it can never be as good as it was in the last quarter and the quarter before because, frankly, everybody reads the same papers. And if you're a CEO of a company and you're looking to expand your operations, you're going to just take your time a little bit more, just to be sure that you're not making a stupid mistake. So the difference between sort of grabbing every piece of the space that you can see, which may push demand 10%, 20% above what is really needed, probably in an environment like this could haven't been conservative by 10% to 20%. And that swing is basically coming out of the froth that we saw in the last two quarters. So that's the way I think about it. But Chris can give you the supply/demand numbers because there's a lot of misunderstanding on those factors.

Yeah. Let's be clear. And indeed, we publish our data quarterly to try and help bring clarity to the marketplace. And what does that data reveal? Well, we forecast 375 million square feet of net absorption and completions this year, calendar year 2022, and see vacancy rate falling to 3.2%. Now our statistics focus on our 30 US markets and is based on the leading source in each market. Now we could look out to 2023. It's a little early, but we foresee a gap, say, 50 million to 100 million square feet in differential between supply and demand. That would lead to a moderate rise in market vacancies, but they would remain below 4%, which is well below the pre-pandemic and historical averages. Now what we're seeing when we look at market commentary is that sources -- some sources are using unconventional methodologies and also include additional non-Prologis markets. So, for example, the next 20 US markets, places like Memphis, St. Louis, Detroit, have a market vacancy rate that's roughly one percentage point higher in our markets and do have a supply/demand imbalance with 126 million square feet under construction versus trailing 12-month net absorption of 88 million square feet.

Yeah. The other thing that's going on, and we're probably over-killing this response, but I think it's probably the single biggest area where we get questions on. Construction has not only become expensive, but also construction periods have been really stretched out because of limited availability of certain components. And by the way, we've been really good about ordering that stuff ahead of time. I'm talking about the market, not our situation in particular. So an extended construction period will make the pipeline of supply sound bigger. So if you're having a third longer construction period, which is what we're estimating, with the same amount of supply, the numbers will just be one-third bigger. That's just math. So again, a lot of confusion about this issue. And I think it's a single biggest disconnect between investor perceptions and the reality on the ground.

Thank you. Our next question is from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Thanks. Appreciate the comments, Hamid, on supply and demand. Could you maybe just talk a little bit about region and what you're seeing both in the US and Europe, just given some of the bigger challenges that we're seeing in Europe right now?

Well, let me give you the general commentary on Europe. Europe is as good as I remember Europe being because actually, the war and the excess population that's come out of Ukraine and in Central -- in the neighboring countries have actually increased demand and led to actually better market dynamics for unfortunate and tragic reasons, but it simply has. I would say the UK has slowed down a bit given what's going on with the politics. But Europe is generally a more muted market than the US, both on the supply and on the demand side. And that's why we're showing lower rental growth rate for Europe compared to the US. So that's not that unusual in terms of its historical relationship. Chris, do you have anything to add to that?

Yeah. I would add, look, the US has been a market leader, especially on the coast with rent growth meaningfully outperform lower barrier markets. We're talking about 10 to 15 percentage annual rent growth, its better on the coast. And outside the US, whether it's Europe, whether it's the UK, whether it's Toronto, whether it's Mexico, vacancy rates are below 2.5%, and we're seeing some of the best market rent growth we've ever seen.

Thank you. Our next question is from the line of Tom Catherwood with BTIG. Please proceed with your question.

Excellent. Thank you and good morning, everyone. Tim, I appreciate your comment about proposals on remaining availability of 52%. I think that was the number versus 38% pre-COVID. How does that 52% compared to the last few quarters? And then maybe more broadly on your kind of leading indicators. How much of a lag have you experienced during prior cycles between a falloff in demand and fundamentals and warning signals coming from your proprietary metrics?

Yes. Thanks, Tom. Basically, the 52% we measured this last quarter is the strongest it's been. It has accelerated from that pre-COVID number that we quoted of 38%, lifted up into the 40s through COVID and has now hit what I think is an all-time high. And Chris, maybe you can pick up the past cycles?

Yes. So, I'd start by saying some of these insights are based on our investments in data that are unavailable elsewhere in real estate and uniquely available in this cycle. One metric that we invented in the last cycle was the IBI by way of a preview or by way of retrospective, I suppose. That metric is great at predicting next 12 months of net absorption and remains at a healthy level today.

Yes. And the absolute vacancy rates today are just crazy low. I mean, like half of what they were in prior cycles at the peak of the market. So whether -- so we're talking about just so that we've got our cycles clear. Probably some of you on the call weren't even born then. But I'm talking about the early '80s oil crisis, the late '80s, early '90s, the SNL crisis, real estate crisis, the dot-com collapse in the early 2000s, the global financial crisis. Compared to all of those, first of all, I don't think we're looking at the same site of situation. And, certainly, we're not starting off a vacancy rate that starts with a 3. So I think it's crazy that we're even thinking about those situations.

Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.

Great. Thank you. Maybe shifting gears a little bit and thinking about asset values. It looks like you're going to ramp up your acquisitions in the back half of the year. I assume that means you're finding some interesting opportunities. Can you talk about how much you think cap rates have moved and how much do you think asset values have moved? And maybe what looks interesting to you that you're ramping up your outlook?

Yes. Good question. The fact of the matter is, we're not seeing that much, because just like any other market cycle when people see an inflection point, basically, transaction volume goes down. And buyers basically go and on deals that are in progress, try to get a price reduction. And oftentimes, they don't get it, and it just doesn't transact. So there is not a whole lot of visibility as to what values would -- are likely to be. I can also tell you that based on our appraisal, external appraisers have actually written up our values by 4% this past quarter. Now are we going to believe that? No, because appraisals are backwards looking. So certainly, I think valuations are somewhat more muted, particularly because of the fraud is not there because of the typical leverage buyer having a harder time being the marginal buyer. Having said that, I think cap rates are likely to remain pretty strong. If you were going to sort of, give me a truth serum and say, where do you expect this to settle? I would say 10 to 25 basis points higher than where we saw it prior to the downturn. And that's on top of the 4% that people have written up. In other words, not from that level. If it's 100, I would say, going down 10 to 25 basis points in terms of value as opposed to going up by 4% on value. So Dan do you have anything to add to that?

Yes. The only thing I would add to that, Jamie, six weeks ago at NAREIT, we talked about we were entering a period of price discovery. And I think at the time, we thought it would be 60 to 90 days before we started seeing some of those comps shake out and we're just not quite seeing it yet. Volumes are way down -- deal volumes are way down, and we're hearing of a number of renegotiations happening for deals that were tied up before, the headlines started to get ugly. So at this point, we'll see how it plays out, but this is in-sync with what we were thinking six weeks ago.

Thank you. Our next question is from the line of Ki Bin Kim with Truist. Please proceed with your question.

Thanks. Good morning, Hamid. So just putting together some of the commentary around normalized customer behavior or at least proposals, how does that translate into your willingness to deploy capital on developments? So, on a combined basis, you and Duke are probably reaching close to $6 billion. Is that a sustainable level, given some of the things that you're seeing or how should we think about that changing?

Yes. Our development activity is always bottoms up deal by deal, leasing opportunity by leasing opportunity and remember, we're not developing in new markets. We're developing in place we -- where we have, I don't know, 20, 30, 40 in the case of Southern California, over 100 million square feet of activity that we're seeing on a day-to-day basis. So, there are bottoms up, they are not like we're building to a goal. It's not that at all. But we are likely not going to be deploying the same amount of capital in development across the cycle. I think we're on the good side of the cycle. Where that will moderate? I don't know. But construction costs today are probably up 50%, land values are up significantly. So, the rents you need to get acceptable margins. And I mean land values at market, not land values at our cost because with our costs, we have significant margins. Really make it tough to make some of the numbers work, particularly for a lot of our competitors that buy land just -- as just-in-time type of acquisition. So, I think that's a real limiter and governor on profitable development and we'll just see. But across a 10-year cycle, we're towards the high end of deployment levels today, for sure.

Thank you. The next question is from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thank you. Similar line of questioning, The yields you have on development starts increased to 6.1% this quarter, which is a pretty wide spread to your acquisition cap rates. But it was the cap rates -- or sorry, it was the acquisition guidance that you increased that to about -- starts. I was just wondering how easy it is to pull-forward some of the development opportunities earlier just given the increase in margins and development yields?

One thing I'll just highlight and maybe throw it over to Dan is just that the development yields you are looking at there while conservative would incorporate our view of rents at the time that the assets are stabilized and as the leasing is occurring, whereas acquisition cap rates are going to be reflecting current and in-place NOI. So, that's a pretty big gap in there to appreciate.

And as it relates -- this is Dan. As it relates to how quickly we can pull-forward starts, we've got this land bank as a differentiator right now, right? We've got $2.5 billion worth of land on the balance sheet worth nearly double. So, this is land that's largely entitled and ready to go. So, that's really the beauty of our development business is that we can start and stop as we see the demand.

Yes. The only thing I have to add is that implied in your question is that we think it's really important to pull-forward development. Again, it is not. We're not building to a particular budget or anything like that. So, if we see the market again bottoms up deal by deal, not being as strong as we wanted, we're just happy to sit and not develop in that market. Not to mention that the big portion of our developments are build-to-suit and lease. So, we know the economics going in.

The next question is coming from the line of Michael Goldsmith with UBS. Please proceed with your question.

Hi, good afternoon. Good morning. Thanks a lot for taking my question. My question is on the near-term expected strength and how that evolves. Your same-store NOI guidance implies it remains at about 8.5% in the back half. Last year growth in the back half was about 200 basis points higher than the first half. So, can you talk about the contributing factors that allow you to achieve stable results despite the more difficult comparison, so accelerating results on the two-year stack and not asking for guidance here, but can you help marry that with when the impact from the expectation that conditions normalize? Like when can that start to weigh on some of the fundamental numbers that you report? Thank you.

Yes, it's Tim. I would say two things. One, the back half, and I think this we discussed last quarter is -- does not have the occupancy gains that we see in Q1 and Q2 that this year, same-store is enjoying in the back half, the occupancy gains driving same-store more muted and it's pretty much rent changed from there. I think to shift your question more to the long-term, I refer back to my comments for the script where you can look at our expiration schedule, you can use the lease mark-to-market. We've highlighted establish a market rent and look at the rents expiring in the remainder of this year, next year, 2024, et cetera. That's the point I made about computing easily 8% same-store growth enduring for many years to come. So, that's how I would use the data and then look at that resiliency.

By the way other than this cycle in the entire history of the company, the highest same-store number ever was 6.5% for the forward one year. So we -- I mean to have sort of 8% rental growth for multiple years, like five years, is just crazy good because the mark-to-markets are so high.

Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Hey, just a quick one on Amazon. They talked about putting space back on the market. Maybe can you give us what's the update in terms of what you've seen in your portfolio and in the market in terms of space being put back and what you're hearing? Thanks.

Hey, Ronald, this is Mike Curless. We've heard the same rumors out on the Street, the 10 million to 30 million square feet. None of it has been substantiated by Amazon. And what matters is what we're seeing on the ground and we're not seeing much at all. We had our national broker calls last week, literally heard about one space that's out there for sublease in the markets that we focus on. But more importantly, let's go to our portfolio of 132 spaces -- And early on, we had an inquiry on two out of 132, let me reemphasize just two. And early on, those got taken off the table. So we have zero in play. And I think if you're very familiar with our portfolio like we are, it should not be a surprise. Those are mission-critical facilities located in Europe. population centers. And to put a finer point on that, in the last 18 months, our retention rate in that set of spaces, Amazon has been 95%, 20 points higher than our company average at the same time And just take it at one step further. As we look to the future, we're 99% leased in the 36 markets, we're doing business with them. We have 54% in place to market, very favorable there. So I think we are very well positioned for anything that might come our way.

Yes. The only thing I would add is that I didn't listen to the Amazon earnings call, but I got more questions about that one comment than comments from the entire industrial real estate industry, which is pretty consistent. So I guess if you have a market cap of over $1 trillion, people listen to you a lot more. But I think the single biggest miss for investors is that they read too much into that commentary. And the facts on the ground just don't support it. So that's all I have to say. And I'm prepared to be on the record for that.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, thanks. Good morning. Within the context and conversation about the lease negotiation period and decrease or, I guess, normalization and competition for space. Are you expecting some of the leading indicators you track to continue normalizing or softening a bit further as you look out over the next several quarters, or do you think that you might see conditions and underlying fundamentals stabilize at current levels, just a bit off the extreme peaks you discussed that you realized over the last few quarters?

I think if I were going to bet, of course, nobody knows is that I think that will normalize at a higher level than normal. But right now, I would say it's prudent to assume that will be slightly down, but better than most market cycles. So that's the way we're running our business.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning. You mentioned that you saw transportation, healthcare and auto pickup in terms of mix of leasing. What's driving those sectors really pick up their activity? And would you expect them to continue to lead the mix over the next several quarters?

Yeah. Here's what I would say generally. We have -- we lease about one million square feet a day, actually more than one million square feet a day. But as big as we are, once you start dividing the numbers into the markets we operate in and the economic sectors that we lease to, the one million square foot lease can move the numbers around radically in a quarter. And by the way, if you look at the same data from other companies, 100,000 square foot lease can really move their numbers around. So I wouldn't look at those statistics on a quarter-by-quarter basis. I think they're totally meaningless because of the law of smaller numbers. So the answer is, I don't know. But I don't think -- I wouldn't look to that for any kind of long-term assumptions on how to run our business.

Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.

Hi, good morning. Have your expectations for supply completions in 2023 changed in recent months? Are you seeing any other players taking a pause from new that development starts due to macro concerns?

Hi Vince, it's Chris Caton. Yes, our expectations have evolved a couple of ways. One is, first, for this calendar year, we have reduced it, not increased it based on the challenge of delivering product as Hamid described earlier and products basically getting stuck in the supply pipeline. We have also reduced our view for next year just as you surmise based on fluidity and the landscape and the rise in financial return of…

Thank you. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yeah. I just have a real quick question. I know the GAAP mark-to-market is about 56% today. Can you provide some color on what the cash mark-to-market is? I believe a few quarters ago, you highlighted was near 30%. Can you kind of highlight where that has trended?

Yeah, it's moving by the same delta roughly at the end of the quarter, it was 48%. You probably heard me say that's not a number I find very useful. I would focus on the net effective because that stat is heavily influenced by where you are with remaining lease terms. So it creates all kinds of problems interpreting it. And the net effective number that we gave you of about 56%. I think it's a better representative of what's going on in the economics and the leases and also better representative of what will go on in our earnings.

Thank you. Our next question is from the line of with Nikita Bely with JPMorgan. Please proceed with your question.

Hi, guys. Can you talk a little bit about the institutional capital in your funds business? A, conversations you've had with them? And is there any change in the amount of capital that these folks are willing to put into your funds? And any color you could provide around that subject?

Sure. I would say similar to the fundamentals of our business, in the past couple of years, we've had more demand for our funds than we've chosen to take money for. In other words, we've turned down people who wanted to invest money in our funds because we had these really long queues, And it was irresponsible to take -- keep taking money when we have hard time deploying that volume of money. I would say that has shifted a bit. So demand for new products has shifted down. And on the margin, there is a little bit more of redemption requests. Well, a little bit more before it was zero, and now we have some redemption requests. All of this is reflective of what I call the denominator effect is that, their stock and bond portfolios are getting hammered, their private equity and venture portfolios are getting write-down. So basically, real estate generally is getting to be a larger percentage, and they have to rebalance. So -- and industrial is probably the best sector to rebalance out of, because that's where the liquidity and the market strength and the embedded gains have been in the last market cycle. So not at all surprising, but we still have plenty of private capital to run our business for a long, long time. And I think we have a great franchise in that area and one that has been really well tested in -- through three or four market cycles. And by the way, that's the same reason we've kept our leverage in that business so low, because when everybody is kind of levering up, the thing to do is to run your business unlevered. And if we see some great opportunities coming out of that cycle, our remaining powder is not just what we have in the queues that we talked about, but also the opportunity of levering up to the more normalized levels that those funds were designed to do. So I don't think capital is a constraint for us on the private side.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning. Thanks. Within the context of the market rent growth that we're talking about and the Street expecting kind of four or five years' worth, are you seeing any markets where either sequentially or on a year-over-year basis market rents are starting to come down from their peaks?

Go ahead, Chris.

Hi. It's Chris Caton. I ran through the regional differences and the pace of growth this year is, in fact, higher than last year. So all the US and those differentials, Europe as well is faster, not slower. So we are -- we have quite a bit of momentum. In terms of individual markets, we track our risk -- our supply risk markets. And that list has not appreciably changed over the past year. We are watchful of supply in a handful of markets, Dallas, Indianapolis and Phoenix. But we would not rate that supply as too much to damage rent growth, but it's -- those are a couple of markets we are watching.

Thank you.

Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.

Hi, everybody. Many companies like retail, they're reporting higher inventory levels and inventory-to-sales ratios are creeping up. So how is the inventory build demand driver that you guys discussed impacted last quarter's leasing? And are you seeing any delays now for this year or really in the opening, just to clarify, was that cautionary, given the macro? So any more insight as you were working to get our head around this emerging driver? Thanks a lot.

Thanks, Derek. It's Chris Caton. Yes, indeed, Tim summarized our view, and we do think it's -- in his script, and we think it's appropriate to be prudent in macro. In fact, we're getting a lot of questions on this, just as you're asking. So, we're going to publish a paper this week on this very topic. Look, summary is the buildup of real inventories for resilience is really only half done and it’s progressing -- it's progressing with our view. Now notwithstanding some of that excess inventory for some retailers for some products, which you just described, the broader landscape has continued to focus on raising inventory levels, reducing stock outs and reintroducing product variety. As it relates to leasing, we are seeing it in the marketplace now for resilience. I'll just give you the basic numbers, trend demand growth in our 30 markets is roughly 200 million to 225 million square feet per year, and we are running at a pace of 300 million square feet per year. So, we have indeed seen quite a bit of growth in excess of -- excuse me, it's 400 million, so 300 million realized over the last 18 months. So, we've begun to realize some of these structural drivers, but more is in front of us than has been realized.

Yes. I would say this is the second worst understood point about our business. I think I would put Amazon first and I would put a level of inventory second, that's why we've chosen to put out this paper, and I just invite you to get into the nuances. These kinds of numbers, particularly ratio type numbers, can be very misleading, if you don't parse them out. For example, whether you include autos or non-autos or general merchandise or non-general merchandise, you'll see those conclusions to be radically different.

Our next question is from the line of Nick Yulico with Scotiabank. Please proceed with your question.

Thanks. I just had a couple of questions here on page four, where you give the leading indicators. I guess on lease proposals, I just want to see what you would attribute to that number having coming down? Is that just now finally realizing the Amazon effect removing them from the market? I mean lease proposals look like they're down 10%, 15% versus your year average. And then on the IBI activity index, I just want to also make sure in terms of the -- what you're serving people about, is that really looking forward on space demand, or is it more of a – I mean the chart looks like it's almost more of a coincidental indicator rather than much of a leading indicator if you look at the last sort of two recessions and how it played out?

All I can tell you is that, it's hard to increase lease proposals when you have less space to rent. We only have 2% vacancy. So, the metric that you should think about is the one that we mentioned in the script, which is that, we are 52% on our vacancy at this point in the cycle, which is by far higher than the normal point in the cycle in terms of pre-leasing or re-leasing of our vacancies. These are proposals by the way.

Yes. And as it relates to the IBI, which you asked, we find it to be more closely correlated with next 12-month absorption than any other economic indicator.

Thanks. The next question comes from the line of Dave Rogers with Baird. Please proceed with your question.

Yes, thanks. Given the comments you made earlier, just about the price discovery in the market. Curious about your thoughts around asset sales dispositions, you didn't update guidance, but should we anticipate that, that pushes later into the year? And then maybe more broadly, as you bring Duke on board, not a question about them, but about you, that effective transaction as a deleveraging event, it seems for you guys. So, do you run leverage back up as a company? Are you comfortable you are? Do you run lower kind of in the future and trying to think about asset sales and recycling going forward?

Yes, pretty hard to run leverage any lower than where we are, But we're not conscious with thinking of leveraging up. And the fact that the combination will actually improve or reduce our leverage is totally coincidental. We're not doing the deal to reduce our leverage. Our leverage is pretty low. So, I would say our leverage is probably much lower than it's likely to be across the cycle. But again, that's opportunity driven, not sort of top-down driven. Tim, anything else?

No, I fully agree on how we view that transaction. And then with regard to dispo timing, nothing has really changed in our forecast. The holding of our guidance reflects our original view. There's always puts and takes on which quarter, some things will land in and what the right mix of assets are going to be, but we're good with our guidance.

Yes. Let me just give you an example of dispo guidance. We had a portfolio that we had on the market, nothing to -- obviously, with Duke. And the buyer came back for a price discount. And we basically told them, they can take a hike. The same thing happened in the week that the world shutdown because of COVID. A buyer came in, they were way down the road on the acquisition, and they came back, this is two years ago, for a price discount, okay? And we told them to go away. They came back a year and a half later, and they paid 15% more than they had the deal tied up on. So, 20% more than where they were trying to drive the price that. I'm not saying the same thing will happen, but I'm just saying, look, at the end of the day, no level of disposition or acquisition or development is going to affect the company that's of this scale and diversity.

Our next question comes from the line of Michael Bilerman with Citi. Please proceed with your question.

Hey. I mean, just staying with sort of the investment market, I just wanted to get some of your views, thinking about it more so from an IRR perspective than a cap rate, just given how large the mark-to-market today in various assets, talking about a spot cap rate sometimes leads to different conclusions? And so I'd be curious of your view how you're approaching it from an IRR basis, either on a five or seven-year basis and how you're thinking about the required return, but also how you're seeing the usual investor change perhaps their view overall on underwriting?

Third, at least well understood point. And you make a great point. What does the spot cap rate mean if your mark-to-market is 50 basis points. If you're investing in apartments, you're there is no mark-to-market. So, the cap rate is the cap rate. But the fact that you have that built-in mark-to-market, just as your question suggests, that alone would drive cap rates way down. So, I think the IRR is a much better measure of return requirements. And I would say, a quarter ago, we were seeing transactions go down in the low five unleveraged IRRs, which is the way we like to look at it. By the way, we're investing at those kinds of returns. But they were literally low five IRRs with an average, I would say, rent growth forecast a market rent growth forecast of probably 3%, okay? Today, I would say the discount rates that people are likely to look at are going to have a six in front of them, low 6s. But the rental growth forecast, even with the same 3% market rent forecast is going to be substantially higher than before because the mark-to-markets have expanded. So the lease mark-to-market of 3% is on top of the mark-to-market. So the total lease growth rate is increasing. So I'm not sure the cap rates are going to move around that much because of the mark-to-market issue. I think what's going to happen is most people don't get that. So they're going to pause a bit on volume of deployment. But any time anybody wants to bring a good deal in one of our markets at -- with 50% mark-to-market at the kind of cap rates that we saw maybe three quarters ago, our number is one 800 Prologis. We'd like to buy as much of that stuff as we can because I think to invest in that with that mark-to-market, -- and that level of discount to replacement costs is our dream come true, and our leveraged friends can't do that. So it's a great environment.

Thank you. Our final question is from the line of Jamie Feldman with Bank of America. Please proceed with your question.

Great. Thank you. I mean I don't know if you can quantify this or not, but when you think about your leasing pipeline, the proposals you've mentioned, 52% of remaining vacancies. Can you break that out by how much you think that is – how much of that do you think is recession-sensitive versus not? So I guess I'm asking, when you think about if they're really trying to get supply chain resilience and all the secular trends we're talking about, how much of the leasing pipeline would just power through that versus take a pause if we do, in fact, have a mild recession as a later calling for?

Jamie, it would be pure speculation. I have no idea is a personal answer. First of all, I'm not sure we're going to have a recession. Secondly, I have no idea if we have a recession, how deep or extended it will be? I'm not sure even what the definition of the recession is anymore because when got not just committee deciding whether we're in a recession or not, and they usually declare it a couple of quarters after it happens. So the answer is, I have no clue. That's the honest answer. Okay. That was the last question. Really appreciate your interest and look forward in our continued dialogue. Take care.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and logoff your computers. Thank you for your participation. Have a wonderful day.