Welcome to the Prologis Q2 2018 Earnings Conference Call. My name is Chris, and I will be your conference operator today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Thank you.
Also note this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.
Thanks, Chris, and good morning, everyone. Welcome to our Q2 2018 conference call. The supplemental document is available on our website at prologis.comunderinvestorrelations. 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 ks or SEC filings. Additionally, our 2nd 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 April 30, we announced a merger between Prologis and DTC. Materials regarding the transaction are posted on both companies' websites and are also available on the SEC's website, including the joint proxy statement that contains detailed information about the transaction.
This call will focus on our Q2 2018 results and the company will not provide comments beyond what is included in our prepared remarks. This morning, we'll hear from Tom Olinger, our CFO, who will cover results and guidance and then Hamid Moghadam, our Chairman and CEO, who will comment on the company's outlook. Also with us for today's call are Gary Anderson, Chris Caton, Mike Urless, Ed Nekritz, Gene Reilly, Diana Scott and Collin McCown who is in our 2nd week with us. With that, I will turn the call over to Tom and we'll get started.
Thanks, Tracy, and good morning and thanks for joining our Q2 call. With very few exceptions, supply in our markets remains in check and net absorption continues to be strong despite being constrained by limited availability. Market rents across our portfolio are growing faster than our prior forecast. We're raising our estimate for full year global rent growth of 6.5% with the U. S.
Up 70 basis points to over 7% and Europe up 140 basis points to almost 5%. The spread between our in place leases and market rents further widened in the quarter and now stands at 15% globally and 19% in the U. S, extending the runway for strong same store NOI growth. Looking to results, we started the year with great momentum and that carried into the 2nd quarter with core FFO of $0.71 per share. Our share of cash same store NOI growth was 7% and led by the U.
S. At 8.2%. These results were exceptional as quality well located space remains in high demand. Our share of net effective rent change on roll was 20.6% and led by the U. S.
At over 30%. Occupancy was up 60 basis points sequentially to 97.4%. Leasing volume totaled nearly 39,000,000 square feet with an average term over 5 years. This includes a record 9,600,000 square feet of development leasing, of which 3,000,000 was in China. Stabilizations in the quarter had an estimated margin over 40% and value creation of $240,000,000 So far this year, we've earned more than $220,000,000 in realized development gains.
Our 2nd quarter disposition and contribution activity was light, but we expect our capital recycling to accelerate in the back half of the year. You'll notice significant increase in both our wholly owned and fund assets classified as held for sale, given that we have several major transactions under contract and escrow funds have gone hard. With respect to the pending transaction with BCT, their shareholder meeting has been set for August 20, and we expect to close within a few days following the vote. The integration process is going very well, and we look forward to adding their high quality assets to our portfolio and welcoming some of their employees to the Prologis team. We continue to expect $80,000,000 in day 1 synergies as well as $40,000,000 of future annual revenue synergies and incremental development value creation.
With one of the best balance sheets in the business, we have access to attractive sources of capital. As we previously announced during the quarter, we issued $700,000,000 of bonds that had a weighted average interest rate of 4.1 percent and term of almost 19 years. We remain very well positioned to self fund our deployment and capitalize on opportunities as they arise, given our $4,000,000,000 of liquidity and over $6,000,000,000 in potential fund rebalances. Moving to guidance for the full year, I'll cover those significant updates on an of our supplemental. Also note that our guidance does not include accretion from the pending DCT acquisition.
We'll be updating guidance to incorporate the impact from this transaction after closing. Based on the strength of our second quarter results, we are increasing the midpoint of our cash same store NOI range by 50 basis points to 6.5%. As a result of valuation gains in Europe, we now expect our net promote income for the full year to be higher by $0.01 per share and now range between $0.12 $0.14 per share. Remaining net promote income will be earned in the Q4. With an expanding build to suit pipeline and accelerated lease up of our spec developments, we are raising our starts guidance by $100,000,000 to now range between $2,300,000,000 $2,600,000,000 We're also increasing our contribution guidance by $150,000,000 to now range between $1,500,000,000 $1,800,000,000 We're raising the midpoint of our realized development gains by $75,000,000 to now range between $450,000,000 $500,000,000 driven by higher valuations across our development portfolio.
At the midpoint, our share of net deployment proceeds will be approximately $350,000,000 which is $50,000,000 higher than our prior forecast. As you think about our earnings trajectory for the back half of the year, you need to consider the lag between when sources are generated and when they're put to work primarily through development. As a result, we expect core FFO for the Q3 to be about a penny down from the Q2. Again, this does not include the impact from BCT. Putting this all together for the full year, we're increasing our 2018 core FFO range between $2.98 $3.02 per share, up $0.02 at the midpoint.
To put this in context, when we laid out our 3 year plan at our investor event in 2016, we called for 7% to 8% annual growth, excluding promotes. At the midpoint of our 2018 guidance, we'll average 8.7% for the 1st 2 years, far surpassing our plan. Importantly, this was achieved while realigning our portfolio and reducing our leverage by over 400 basis points. As a reminder, every 100 basis points of leverage translates to about 1% of core FFO growth. Looking ahead, the combination of our significant embedded rent upside, the build out of our land bank and leverage capacity will continue to fuel our sector leading performance.
And with that, I'll turn it over to Hamid.
Thanks, Tom. I want to touch on our long term outlook, but first let me comment on trade and tariffs since we've been getting a lot of questions on those topics lately. My insights aren't unique, but what we hear from our customers so far is that they're moving forward with their growth plans and we have yet to see any change in sentiment or decision making on the ground. We remain cautiously optimistic as the vast majority of our portfolio is located in large consumption markets, including a significant focus on city distribution and last touch delivery. However, escalating trade tensions are a negative for the global economy and akin to attacks on consumers.
If today's political rhetoric intensified and translates into actual protectionist policies, it will be a negative for all businesses in the U. S. And abroad, including ours. At the same time, our portfolio and balance sheet are in the best shape they've ever been and any dislocation may actually create opportunities for us. We've built an enterprise and team that enables us to execute unsizable transactions such as DCT while delivering best in class results and carrying out the platform initiatives that I discussed in our last call.
In closing, I'd like to point out to the perplexing lag in our recent relative stock price appreciation in spite of our sector leading operating performance and strong guidance. Some of this lag is surely attributable to the pending DCT transaction, which has helped the smaller companies in the sector. I suspect the rest of it is caused by all the rhetoric around trade and tariffs. As the industry's bellwether and the only global company, we believe this factor has had a disproportionate effect on our company's recent relative performance. Regardless, we remain laser focused on executing our long term business plan and are confident that we'll continue to generate earnings growth significantly ahead of the pack.
Chris, let's open up the call to your questions.
The first question comes from Craig Mailman of KeyBanc Capital Markets. Your line is open.
Hey, guys. Maybe a 2 part question here. Hamed, appreciate your comments on tenant sentiment. Just curious, though, as you guys look at the portfolio, maybe where do you see the most risk or I guess least exposure to consumption in the portfolio? And then just as you guys are thinking about development starts and you guys are kind of contemplating 2019, how do the tariffs and material costs kind of weigh your at least appetite here to be bidding out projects and other things in advance of maybe buying out the materials?
Okay. With respect to the market that's probably most exposed to trades and tariffs, I would say the border markets in Mexico are part of that because they are more of a manufacturing and transshipment market than a consumption market. But you got to understand a lot of the value added is material imported from the U. S. With some labor value added to it and then re exported to the U.
S. So you really need to focus on just the incremental value added in Mexico and that for a lot of commodities is not a huge number. So the tariffs would only apply to that. For example, a lot of the steel and actually aluminum that's imported for car manufacturing comes through the border and then back. There are also some manufacturing markets in the Midwest that are could be exposed to this because a lot of those are reliant on first level order material that are imported in the U.
S. But so far, I think all those effects are small. With respect to our decision making as to the start of development and all that, So far, the increases in construction costs have been in line with our expectations. And really it's on the next series of projects that we're going to see any impact from material expense increases. Those are all going to be under a buck a foot.
And as you've seen from our strong margins, we have a lot of room to absorb those kinds of cost increases. But more importantly, those cost increases are going to translate into higher rents because they will over time curtail supply. So you can't just look at the cost increases, you got to also look at the impact of that on supply and rent growth.
Your next question comes from Manny Korchman of Citi. Your line is open.
Real estate is typically a lagging indicator rather than being a leading indicator. And so I guess as we think about all of this trade policies and rhetoric that's going on, what are the indicators or data points that you're seeing that give you the confidence that it's not bleeding into effectively the demand
and it accounts for about 70% of GDP. So GDP growth and consumption growth within as a subcategory, those are probably the 2 biggest drivers of demand. The second biggest driver of demand is reconfiguration of the supply chain. I mean the long term reconfiguration of the supply chain. But on top of that, we of course have the much more recent and stronger reconfiguration or addition I should say because of e commerce.
So that by far overwhelms any slowdown, if you will, in the other factors that we've seen so far. We don't really look at supply and demand as a way of projecting into the future as to what our underwriting will be. Those are the results of those other factors. We really look at much more the leading indicators that affect supply and demand as you pointed out.
Your next question comes from Ki Bin Kim of SunTrust. Your line is open.
Hey, everyone. So 20% of DCT's portfolio was in California and given that the merger triggered Prop 13, could you talk a little bit about how this increase will impact the overall cost to tenants in California? And is there some concern to your ability to raise rents after the tax increase? And when does that kind of actually kick in?
Yes. So this is Gene. I'll take that one. So the proposal
for effectively split rolls is not going to be on the 2018 ballot. So it's not on the ballot now. It may appear next year
or more likely in 2020.
So the actual timing is probably a couple of years out from now. Now having said that, even with DCT assets, I think we're better off than
the average California commercial property owner given
the vintage of our properties. Over the long term,
our tax exposure is likely to increase. But if you boil this down to how does it affect our
customers' costs, it's less than 0.5% of our customers' supply chain costs.
And I'm talking about what we see as a likely increase in taxes, which should be about 5% overall. So, I think it's going to take a while to take hold. And I think ultimately the impact isn't
really that great.
Yes. If you look at our overall California business, for example, Southern California is 72
is the
largest portfolio and then in about 20 plus 1,000,000 feet in the Bay Area and the like. So we probably have 100,000,000 square feet in California, thereabouts around numbers. And I would say, and I haven't done the math with this, but I'm pretty sure that our strategy of focusing in California started at least a decade sooner than everybody else's. So it's likely that our cost basis is significantly lower than other people. So until you have the split roll and everything rolls to market, we'll actually have an advantage and after that we'll be on par with whoever else is supplying space.
So I view our position as actually very favorable.
Your next question comes from James Feldman of Bank of America. Your line is open. Great.
Thank you. Good morning. So the I think your percentage of build to suit and your development starts in the quarter was down to about 25 percent. So can you talk about how we should expect that to trend going forward? And going back to Craig's first question, I think the last part of his question was how do you think about planning going forward even looking ahead to 2019 for development starts, given so much uncertainty out there?
Maybe talk about what you think the mix could be farther out and your conviction on the pipeline?
Jamie, this is Mike Curless. I think
you really can't look at
2 quarters for build to suit percentages to get a trend. I encourage you to look at the trailing 4 quarters and you'd see an average of about 43%. That's indicative of the range we're expecting for this year and why we feel confident about that we've got a very strong pipeline both in Europe and the U. S. The multi market inquiries are way up, real lack of available space out there in some key markets.
So I expect an arrow up on those 2 percentage in the second half and that overall percentage to settle in around the 40s.
Your next question comes from Vikram Malhotra from Morgan Stanley. Your line is open.
Great. Thanks for taking the question. I wanted to just get some more color and thoughts about maybe the ability to push rents from here on maybe by market and then product type? We are obviously close to peak occupancy. You took the guidance up.
But it seems to me that obviously that's the key driver of growth from here. So if you could just talk about any changes you're seeing and maybe anything that surprised you in terms of rents this quarter?
Well, I'll start and then Gene and Gary can comment on the specifics. But I think based on some of the work that Chris Casey has done and shared with you, you can see that logistic costs, real estate costs are very small part of the supply chain costs. And to the extent that proximity to customers is becoming more and more of a valued attribute, I think you're getting a shift in mentality from a cost focused decision criteria to much more of a service level and expediency focused decision making process. So bottom line, look, for 10 or 15 years, these customers had a pretty good run of being able to pick one landlord against the other and getting people to grind it out for the last penny of rent. I think the smart ones have figured out that right now with a market that is so undersupplied and continues to be undersupplied that really they got to look at the utility of the space and its ability to affect their service levels and go for the good locations and lock them up because it just takes one competition with another user and a loss of 1 piece of space when they get that religion very quickly.
Also, keep in mind that we have a 15% or thereabouts mark to market in our portfolio. So and that number keeps increasing even though we're burning off of a lot of the below market leases. So the market continues to be really strong and look, there's always the possibility of a recession or a great recession or something and I'm no better at predicting that than anybody else, but so far so good on our pricing power.
So maybe a couple of comments about Europe. We've been talking about Europe market rent growth for some time now and we're actually starting to see it come through. Tom mentioned in his opening remarks, but I mean the sentiment in Europe is very positive demand is healthy, vacancy rates are down. We are approaching 5% going to 4.9 percent. And what Hamid didn't touch on or maybe did at a high level is construction costs are way up.
They are 16% up over the last 24 months and that is underpinning this market rent growth that we have been talking about. We have taken our market rent growth assumptions for this year up 140 basis points to almost 5%. So, we are finally starting to see this come through and that's in the face of 30 basis points of cap rate compression. So setting the cap rate compression aside, market rents would be up even higher. So, I think good things are coming from Europe finally.
Yes. I would remind those of you who have been long term participants in these calls that back in 2015, 2016, we talked about 2018 being a year that the rents in Europe were going to accelerate. And after that, there could be a possibility of those rental growth rates actually exceeding the U. S. And I wouldn't be surprised if that were to happen in 2019, certainly by 2020.
So Europe is actually going to end up being a tailwind instead of a headwind.
Your next question comes from John Guinee of Stifel. Your line is open.
Thank you. I noticed a number of asset sales, looks like you sold 29 buildings just in the Q2 alone, including I think, 8 or 10 in Chicago, a handful in South Florida, 9 in Seattle. And at the same time, you also dropped your land inventory to a stunningly low $1,100,000,000 Any comments on all the disposition activity and the reduction in your land bank?
Let me comment on the land bank. The land bank, we've been trying to get it to around 1,000,000,000 dollars since the merger and we're getting there. And what that land bank doesn't show is a whole bunch of land that we have under option, option, which actually gives us the capacity for growth, but we don't have to carry it on the balance sheet. So the land bank is getting to where we want it to be. With respect to dispositions, let me ask Mike to comment.
John, hey, it's Mike. Dispositions have been ramping up and as we suggested, we have a busy second half with respect to well over $1,000,000,000 of dispositions well underway. As Tom mentioned in the opening remarks, several transactions are under contract with hard deposits, a series of one off transactions, portfolios make up that list. Pricing is very strong both in Europe and the U. S, certainly a good time to
be a seller.
Expect to do an equal amount in Europe and the U. S. And a bright star of some real good activity in the regional markets in the U. S. So after this work is done through the end of
the year, we'll be in real good shape
of working our way through the rest of our non strategic list and we feel pretty darn bullish about our ability to get this all done this year.
We'll be done with our non strategic list with the exception of what we will then go through as part of DCT.
Your next question comes from Michael Carroll of RBC Capital Markets. Your line is open.
Yes, thanks. Can you provide some additional details on the tariffs? And I'm particularly interested in understanding how the tariffs could impact U. S. Exports and your portfolio.
What type of warehouses do explorers typically use to send goods out of the country? And are these facilities mainly concentrated in the port markets?
Most of the U. S. Exports are things like soybeans and things that don't go through warehouses. I mean, agricultural products is what we are really exporting. A lot of the manufactured stuff and stuff that goes into containers is are the stuff that we are actually importing.
So, I don't see a big impact on that at all.
Your next question comes from Tom Catherwood of BTIG. Your line is open.
Thanks and good morning over there. Switching over to development yields. You guys reported 7.1% yields on your 2Q stabilizations. But if we look back between 3 5 quarters ago when you likely would have started these projects, the yields back then ranged from 6.3% to 6.5%. So it looks like in that short period of time, you're picking up anywhere from 60 to 80 basis points of yield.
So the question is really kind of what's driven that upward bias to yields over the short timeframe? And has anything changed between now and 4 quarters ago that's altered your outlook on development yields and kept them lower from here going forward?
Well, development yields are higher than we would have expected because rental growth would have been higher than what we would have projected at that time. And the margins would even be larger because notwithstanding the rental growth, we've had cap rate compression. So we perform a much lower margins, at least we have been in the last 4 or 5 years than we actually end up realizing. So that is the explanation for that. As to going forward, I think every development deal that we approve is scrutinized with respect to the impact of the higher construction costs.
We are using actually higher cap rates than are visible today in terms of underwriting exits for purposes of margins. Look, this is all a guessing game about cap rates on rents a year and a half from now. But so far, we've been fortunate on both rents and cap rates and we're building in the cushion for some slippage the other way. We're not expecting any, but it would be imprudent not to build that in when we are dealing with big grants and big cap rates.
Your next question comes from Rob Simone of Evercore ISI. Your line is open.
Hey guys, thanks for taking the question.
I I was just wondering if maybe you could comment on the update to the same store NOI guidance and what it means for the back half of the year. It seems to imply kind of like the 5% to 6% range over the second half, which is obviously down from Q1 and Q2. I was just wondering if you could line out or describe any discrete items that might be driving that?
Hey, Rob, it's Tom. The main driver of why we're of the second half same store is going to be free rent burn off approaching more normalized levels. So as you think about our midpoint of our guidance implies 5.6% same store growth in the second half. And you can get there by rent change and bumps are going to get you 4.50 ish basis points. Free rent burn off is going to be about 50 basis points, which is about half of what we saw from the first half and then a little bit of occupancy and other items gets you to that 5.6%.
Your next question comes from Vincent Zhou of Deutsche Bank. Your line is open.
Hey, everyone. Most of my questions have been answered, but just a question on the cap rate compression that's been mentioned earlier and then just some of the commentary on the development gain guidance, which was increased pretty significantly, and I think obviously on valuations. So just curious, are you seeing that cap rate compression really accelerate here in the Q2? Or is that more of a catch up from maybe some conservatism from earlier in the year?
I would say cap rates have continued to compress throughout the year. Even the time when there was a view that interest rates were going up, We never saw it in the private market cap rates. So I would say it's been a continuous movement and not a step function. So yes.
Your next question comes from Eric Frankel of Green Street Advisors. Your line is open.
Thank you. Two questions. One regarding trade. Just given how integrated supply chains are throughout the world in the U. S, is there any thing that could be done if tariffs are put in place in a larger scale or are we just going to have to settle for higher prices?
And then second, there was a Wallachie journal article this morning from the comment about the New York City Economic Development Corporation putting in a 100 they're planning to put in a $100,000,000 of infrastructure to allow for more transit of goods via rail and waterways rather than trucks. And I'm just wondering if there's some sort of business opportunity for your company down the road related to those type of infrastructure solutions?
Sure. With respect to your first question, you're absolutely right. I mean, the world economy is getting very interconnected every day and more so, notwithstanding the recent protectionist talk. And it is not normal, it's not a simple factor of looking at your trade balance with a given country and calling that trade because things go through 5 or 6 different countries oftentimes and maybe back and forth to some of those same countries before they end up with the consumer. So the world economy is a much, much more complicated picture than this sort of 1960s view of somebody makes something somewhere and ships it over here.
So it will have all kinds of unanticipated effects on the global economy. But I would tell you this, there's a lot more flexibility in the global economy in terms of manufacturing and things move around very quickly. We saw things move around very quickly from Eastern China to Western China and then to Cambodia and Thailand and all that when labor costs move around. So I think it's pretty difficult to take unilateral action and affect the global economy. I think what you end up doing is putting your own economy in peril.
So the bigger risk that I see is not a risk to the global economy, but a risk to the U. S. Economy because we're basically taxing the very same people that are looking for jobs and why is unemployment rate in the high 3% rate is because finally this economy is employing some people. Not a great idea to suppress that. I think that's where the big risk is.
With respect to transit dependent opportunities, sure, we're looking at all of them. I mean, as you know, we've got a huge presence in New Jersey specifically. So anything that happens in the New York area with respect to rail transit, we're the beneficiary of that. And I'll give you some specific examples. In places like LA, Chicago and New Jersey, we've been active acquirers of land for container storage because a lot of these rail yards don't have the capacity on-site.
And this has been a great way of carrying land into the next development cycle because the yields that we can get by leasing land for container storage are very strong and give us a lot of flexibility with respect to the timing of our future developments.
Your next question comes from Manny Korchman of Citi. Your line is open.
Hey, Tom, I just wanted to revisit a point
you made earlier. I think
you're talking about 3Q guidance being a a penny below 2Q run rate, which would imply a big ramp into 4Q. I was just wondering if there's any onetime items we should think about that or if that's just going to be a natural take up in leasing or something
else? Yes, Manny, what we see in Q4 is the drag we're seeing in Q3 versus number 1. We're seeing some higher strategic capital revenues going into the 4th quarter just with timing and transactional related. And then 3rd is just some expense timing between the quarters.
And then of course NOI growth continues to tick away. Look, the bottom line is that with respect to occupancy rent growth and all the real fundamental things, the business is much better than we would have expected at the beginning of the year. But it's so good that we've taken advantage of that to get more liquid by accelerating some of our dispositions. That creates a drag because we're more liquid and have less deployment, less net deployment. We actually have more gross deployment than we thought too.
That's a good news story because I don't particularly care about a penny or 2 here or there on earnings in any given quarter. We're setting up really nicely for a growth rate beyond that. And I think the expanding mark to market in the portfolio is going to ensure that not only we'll have stronger same store growth, but it will be for an extended time period.
Your next question comes from John Guinee of Stifel. Your line is open.
Great. Hey, Tom, if you've answered this already, let me know. But I think you expected some pretty significant cost of capital savings as you paid off the DCT debt and redeployed or took advantage of your own cost of capital. Two questions. What sort of process do you see there?
How many one time items do you think we're going to have in tendering for debt? And then can you get the achieved savings you expect given the execution you just did at $400,000,000 10 year bonds at 3.8% and 7.8% and 300,000,000 of 30 year bonds at 4.38%?
Percent? John, it's Tom. So yes, to answer your second question, yes, we think we can achieve the projected savings and quite frankly, then some because as we look at the $1,800,000,000 and this is what we said before and it holds and if not better, the $1,800,000,000 of debt we'll assume in connection with DCT, we're going to do that through a combination of U. S. Dollar, which you saw, euro and yen.
And we're going to get we're going to be doing on average easily over 10 year debt. So we're going to get duration out of this and we're going to see rates come in. When we announced the DCT transaction, our weighted average cost of debt was 2.9%. And we said we thought we could refi all the debt at that rate, if not better. I'm very confident that we will do better than that regarding transactional costs with the debt.
We will be looking at any incurring costs to take that debt out. But as we always look at any the economics of any debt tender transaction or retirement transaction, we always look at the underlying economics on a NPV basis and look at the max maturity to get the maturity to get the real economics and these things pencil to where I would expect that they will make economic sense.
Your next question comes from Manny Korchman of Citi. Your line is open.
Hey, it's Michael Bilerman. Amit, I just wanted to come back to sort of the trade and sort of economic impact. And you talked a little bit about that the biggest risk is clearly to the U. S. And its economic situation.
And therefore, given your portfolio is while global has a significant exposure here would be impacted just by from an economic perspective. When you look at your customers, the 3PLs, transport, retailers, both e commerce players and the bricks and mortar traditional players and manufacturers, which of those verticals are you paying the most attention to right now in your conversations to really understand their sort of desires right now in terms of space and utilization and they're going to be the leading indicator here rather the economy rolling over is going to be the lagging one. So what is it about which ones of those are you spending the time that you think is going to give you the most accurate data to know what's going what's happening?
So let me answer I think there are 2 embedded questions there. One is what are the 2 segments that we're most focused on if you will in terms of the upsides and downsides in our business. In terms of upsides, we're very focused on obviously the e commerce players in terms of upside. And by e commerce players, I don't mean just e commerce players, but also traditional retailers that are building a parallel supply chain. And you've heard a lot of those announcements and obviously there's a lot of growth coming out of that.
So that would be on the good news side. Correspondingly, we're looking on the bad news side on the impact of all this on struggling retailers and we do have a retail sort of watch list and the like. And we're being very proactive on lease renewals to not renew with those retailers in this strong market and to replace them with other customers that are stronger. With respect to the impact of these tariffs, I think where you're going to see the most impact in the near term is going to be on autos. And I mean, look, we have heard a lot of talk about direct German car, if you will, tariffs that are very, very significant and possibly trading that for elimination of tariffs on American cars in Europe.
I don't know where that's going to shake out, but that's going to really affect the car business. Similarly, steel and aluminum, a lot of that goes into cars and price of cars are going to go up. And the good news is that not a lot of cars get stored in warehouses, but a lot of car parts get stored in warehouses. So we're looking at the autos as probably the most nearest term impact on the things that you mentioned. Okay.
I think Michael's question was the last one. Thank you for joining our call and we look forward to talking to you next quarter, if not before. Take care.
This concludes today's conference call. You may now disconnect.