Q2 2021 Prologis Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will be placed on music hold thank you for your patience.
[music].
Good morning, and thank you for standing by.
And to the Pearl not just second quarter 2021 earnings conference call. At this time all participant lines are in a listen only mode.
After the Speakers' presentation, we will have a question and answer session to ask a question. During this session you'll need to press Star then 1 on your telephone keypad. Please be advised for today's conference is being recorded if you require operator assistance press Star Zero and now my pleasure to hand, the conference and part as senior Vice President of Investor Relations Tracy Ward.
Tracy I had it for you.
Thanks, Holly and good morning, everyone and welcome to our second quarter 2021 earnings Conference call. The supplemental document is available on our website for a lot just dot 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 cash.
Current expectations estimates and projections about the market and the industry and which provides us operating as well as management's beliefs and assumptions forward looking statements are not guarantees of performance and actual operating results to be affected by a variety of factors for a list of those factors. Please refer to the forward looking statement notice.
And our 10-K or SEC filings.
Additionally, our second quarter results press release, and supplemental do contain financial measures such as <unk> and EBITDA that are non-GAAP measures.
And in accordance with Reg G. We have provided a reconciliation to those measures. This morning, we'll hear from Tom Olinger, Our CFO, who will cover results real time market conditions and guidance.
And I'll get Dan and Gary Anderson, Chris Caton, Mike Curless day on letter <unk> Gene Reilly and Colleen Mckeown are also share with us today with that I'll turn the call over to Tom Tom Lee and please begin thank you Tracy and good morning, everyone and thank you for joining our call today.
Second quarter exceeded our expectations, both in terms of our results and outlook for 2020, 1 and beyond.
And with our exceptional portfolio and team we set high watermarks across several measures this quarter.
And for space is robust and diverse and market conditions remained the healthiest and our 38 year history.
And the second quarter lease signings for 64 million square feet and lease proposals were 84 million square feet. Both remain above average and were driven by new and development leasing.
Likewise, the Prologis ibi and customer activity index reached a new high and the second quarter and early indicator of strong future demand for it.
Leasing mix is broad and currently the greatest demand is for spaces above 100000 square feet.
For smaller spaces activity is picking up we signed 518 leases totaling 18 million square feet and the quarter for highest volume and this segment and 3 years.
For customer segments ecommerce continues to lead the way, representing 30% of new lease signings and the second quarter.
While Amazon remained steady at 6% of total new leasing we have seen many more ecommerce players come to the table. For example, we signed 168, new e-commerce leases and the first half of 2021 versus 53, and the first half of last year.
Supply chains are racing beginning to restock and as they do and create more demand going forward.
Containerized imports are up 33% through may versus pre pandemic levels as retailers replenish their supply chains.
While inventories have risen 3% from their trough and they have struggled to grow this year as retail sales are up 19% from pre pandemic levels. We.
We see the current low level of inventories and our space utilization, which at 84, 3% is below the long term average of 85%. This is yet another sign that our customers are operating what sub optimal levels of inventory.
Putting together a recent outperformance and ongoing momentum we are raising our 2021 U S forecast for net absorption by 20% for 360 million square feet and deliveries by 8% to 325 million square feet looking forward, we foresee continued supply balanced by demand with historic low.
Vacancy of 4 and 5% carrying into 2022.
With balanced demand and supply for acute scarcity and our markets is driving record rent and value growth for.
Our operating portfolio lease percentage rose by 80 basis points to 97, 2% at quarter end customers continue to compete for space and are making decisions faster with least gestation and a quarter of just 44 days.
When we look at the factors impacting supply significant barriers exist and our markets and include a lack of viable land increasingly difficult and expensive permitting and entitlement processes and rapidly escalating replacement costs.
Our research team released and excellent paper on this last month, which you can find on our website.
Our supply watchlist remains quite small and we review of Houston, and the quarter, leaving just Spain and Poland.
Accelerating demand in the quarter combined with ultra low vacancies and translate it has a very strong rent growth of 4.1% and our U S markets exceeding our expectations. As a result, we are raising our 2021 rent forecasts and all time high of 10, 3% for the U S and up approximately 40 basis points from our prior estimate.
And 8% globally, which is up 300 basis points or.
Our in place to market rent spread is now the widest and our history at 16, 9% up 330 basis points sequentially. This represents future gas and the tank of nearly $700 million and NOI for.
For <unk> 90 per share.
Turning to valuations our assets had the strongest quarterly uplift and our history rising 8% and the second quarter alone with the U S up more than 10% and Europe up 5.6%.
On the topic of valuation and I want to point out that we enhanced the NAV disclosure and our supplemental related to property management fees.
Given the size and scale of our portfolio, we create substantial value for our operational advantages as a result, we know that real estate is worth more and our hands.
Currently we are now, including net property management fee income as a component of adjusted NOI and R&D.
Thank you.
Switching gears for results for the quarter, our team and portfolio continued to deliver excellent financial results core <unk> was $1 <unk> per share with net promote earnings effectively zero right.
Change on rollover was 32%.
Occupancy this quarter and was 96, 8% up 110 basis points sequentially.
Cash same store NOI growth accelerated to 5.8% 290 basis points year over.
We tapped into favorable market conditions, and dispose of $880 million of non strategic assets across our portfolio.
In addition, just last week, we completed the sale of a $920 million owned and managed portfolio, including all of the non strategic IPG assets.
Worth noting that to date, we have sold $2 billion of non strategic assets from our IPG and held for T acquisitions are pricing more than 23% above underwriting.
Turning to strategic capital our team raised almost $600 million and the second quarter equity cues from our open ended vehicles.
And at quarter and hitting another all time high robust investor interest has prompted private equity limited partners to shift away from diversify to more sector specific funds.
Particularly for the logistics sector.
In light of recent asset management transactions and public comps the value being ascribed to our strategic capital business has meaningfully understated.
For the balance sheet, we continue to maintain excellent financial strength with liquidity and combined leveraged capacity between for largest center opened and the vehicles.
$14 billion.
Moving to guidance for 2021, and our outlook is further improve given higher rent growth higher valuations and robust demand here.
And here are the key updates on and our share basis.
We're increasing our cash same store NOI growth midpoint by 75 basis points to now range between 5.5 and 5.7 and 5% we.
We expect bad debt expense to be approximately 10 basis points and gross revenues down from our prior guidance midpoint of 20 basis points and well below our historical average.
And we're increasing the midpoint for strategic capital revenue, excluding promotes to $470 million up $15 million from prior guidance.
Upward revision is due to increased asset management fees, resulting from higher property values.
Faster development lease ups and higher asset values are also leading to an increase and promotes we now expect net promote income of <unk> for this year and increase of <unk> <unk> from our prior guidance.
We're also increasing development starts by $300 million and now expect a midpoint of $3.2 billion.
Build to suits for comprise more than 40% of development volume.
Our owned and managed portfolio.
Most of land options and covered land place supports $18 billion for.
And for future development over the next several years.
We are also increasing the midpoint for dispositions and contributions by $650 million and total this increase will have roughly a <unk> <unk> drag on earnings this year, given the timing to redeploy incremental proceeds.
We now expect to generate net deployment and sources of $200 million at the midpoint with leverage remaining effectively flat in 2021.
Taking these assumptions into account, we are increasing our core and confirmed midpoint by <unk> <unk>.
And narrowing the range to $4 <unk> to $4.80 per share.
<unk>, excluding promotes will range between $4 and <unk> and $4 <unk> per share representing year over year growth at the midpoint of almost 13%.
We continue to maintain exceptional dividend coverage and our 2021 guidance implies a payout ratio and the low 60% range and free cash flow after dividends of $1.3 billion.
In closing the first half of the year has been extraordinary and our outlook is equally promising visibility into a strong future organic earnings potential is very clear, we have a significant embedded and place to market rent spread and development ready land portfolio substantial balance sheet capacity and ability to create value for our customers.
And the real estate for.
And that I'll turn it back to Holli for your question.
And ladies and gentlemen, and as a reminder, if you would like to ask a question. Please press Star then 1 on your telecom keypad.
And our first question is going to come from the line and Steve <unk> Evercore ISI.
Hi, Thanks, good morning out there maybe.
And maybe Tom or Hamid I was just wondering if you could spend a little more time, just talking about some of the demand drivers across some of the various.
You know sub sectors, and and maybe regionally I know Europe, maybe grew a little bit faster, but maybe just provide a little more context.
And around which businesses and and which regions you're seeing the most demanded.
Hey, Steve, It's Chris Cade, and I'm going to jump in with a few highlights and then I think Gino share. Some color I think there are 3 or 4 demand trends that are presenting themselves. The first is broadly the diversification of E. Commerce. So it's the internationalization of the major players for smaller mid sized players stepping up the second is the growth leaders.
Last year, and leasing space and think about food companies Pharmaceuticals and.
And durable goods companies and the third trend would be supply chain resilience. For example, we see and import markets are among the strongest they've ever been and so you have several clear themes playing through demand.
Yeah, So Steve and the only thing I and add to that if you wanted to give some geographic color is coastal markets are definitely doing better and you look at the U S.
Southern California, and New Jersey by far I think have the strongest man and dynamics.
But it also say that its very difficult to find a weak market globally, no matter, whether and Latin America.
Europe the U S are theirs.
Strength and demand really everywhere.
Thank you and our next question is going to come from the line of Emmanuel Korchman with Citi.
Hey, good morning, everyone.
Chris maybe this is another 1 for you but I.
And you spoke about broad based demand, but is the specific demand from especially the e-commerce customers changing at all or are they kind of willing to get whatever they can and are they being more specific as to what they want and are they pinpointing markets is it a wider sort of.
Paint brush up demand can you help us figure out what they are actually asking for when they come to you.
Yeah.
Yes, so the message on E. Commerce is actually it's very diverse and I think if you look across the maturity of different organizations. They all want something slightly different.
So if you have a large international player I do think theyre getting much more pinpointed, we've seen a lot of growth for example, and last touch Submarkets. There is a lot of focus on shortening those delivery times, but more midsize organizations might be and AR and AR and adjacent location or in our regional location to still build out the basic infrastructure for executing online.
Yeah.
And our next question is going to come from the line of Caitlin Burrows with Goldman Sachs.
Hi, Good morning team and I was just wondering if you could talk maybe about and development for largest is obviously enacted developer you increased your guidance for development starts and stabilization and also day contribution. So could you give some detail on how you think about your development businesses valuation and how they develop.
And thank gains are related to that and how it might be different than peers activity and.
And with a lot.
Thanks for your credit this is Thomas I'll.
Take a first shot at that I think there are several aspects of our development business that are for.
And we're quite unique the first I would just think looking at the size of that portfolio of $18 billion of built out.
Almost 20% of our market cap and.
And that portfolio was very focused and our high barrier markets in which we operate so we've got a land bank that we can build out a very very high quality portfolio Thats and high demand, it's very diversified across.
And 19 different countries and it's a huge opportunity set that our development platform has to build out and just just having the menu to seek the best returns and to solve customers.
Problems across all of those different markets is a huge advantage and I think that leads to just the durability of of <unk>.
Development gains. So if you look at our track record we've got a track record of 20 years, developing $37 billion of assets and 20% Unlevered IRR.
And we get those results verify and externally by Duff and Phelps by the way, but so and incredible track record of durability. So when you look at the the.
The 18 billion and build out our history of being able to continue to.
Developed a very very attractive rates and if theres, a very very long runway of opportunity that's true.
And just presented in front of us.
And then do you.
Point on realized gains and I think that's another point that makes us quite unique.
Given our capital structure and how we are.
Hmm.
And how we want to structure the vast majority of our assets outside the U S are held and funds, but we're developing the vast majority of those assets on balance sheet, Europe and Japan.
Mexico and and those assets.
With very few exceptions are contributing into our funds. So there's a real crystallization of those gains. So when you think about the 20% Unlevered IRR is all of that development. The vast majority of those gains were realized and cash and that's a real cash flow that is part of urea for Boe and should be embedded in your.
And I think when we look at valuation and particular for development.
I think theres a very.
Scattershot approach because theres a couple of different things you have to do obviously, you've got the CIP. That's in front of you you got to finish that value that you've got your land bank and our case 18 billion and that you'd have to value.
And and then Theres also residual for this platform right. This platform and has a history of 37 billion in 'twenty.
And 20% Unlevered IRR and there is a value here. So I think you can put those all together there is different ways to do it obviously, but.
You know I would just encourage you to take a look for cash flows at this thing and generates historically and.
And I think youre going to find that.
The valuation for for our development capabilities, our I would say significantly undervalued.
Thank you and our next question will come from the line of Craig Mailman with Keybanc capital markets.
Hey, everyone.
I appreciate the the update there and where you think market rent growth is and you know.
Clearly your net absorption.
Stats as well just looks like we're still in equilibrium, but I'm. Just curious are you guys.
Talk to tenants.
And kind of continue to push through rents or maybe even accelerate that.
How does the conversation changed now with labor shortages, continuing and maybe even getting a little bit worse places and just gas prices continue to rise and impacted the transportation side.
I mean, our rents even how high up on the list are they at this point and maybe update us on how many deals you're losing as a result of rents versus other factors.
And that's a few questions.
This is Jean so I'll take that.
So I think your.
Yeah.
If you look at the conversations we're having with customers and what.
There.
Paint the pain points are.
Relative.
Excuse me.
Janus and having a little bit of issue with that.
Access to it so let me get to Liberty.
While and he theres.
And Theres a stroke.
So the conversations are mostly around labor that is absolutely a pain points.
But you know day.
There was an ability to push through pricing today, because when you have a retail sales jumped 20%.
And from pre pandemic levels and God knows what percent from and then Inc levels and the supply chain is dry and Theres very little.
And there's very little probability of losing that piece of business because people are flushed with cash and out there spending money I think just kind of continue for a while so basically everybody's harrods on fire trying to keep up with demand and.
And Mike any any additional color on that yes, I think 1 way you can really.
And represent this is the fact that we've had more customers competing over space and we've seen and we're before and that creates some difficult situations, but we always start with transparency with both parties, but I got to tell you. The the rent becomes a very minor discussion just for the availability and accessibility of that space becomes the priority. So I think that's a good.
Description of what we're seeing out there in terms of the customers' priorities, Craig and I wish we were losing more deals because of rent because we actually look at that on a quarterly basis by geography, and the number is under 5% which to me. It means we may not be pushing rents and up so.
And the way the fact that we're not losing does those deals to a range may not be such great. Thank.
Let me jump in here and continue its Mike.
My point, but with respect to gas prices.
And that pretty much makes a location all the more important.
So I think that's probably it.
Tailwind with respect to rents.
Yeah.
And our next question is going to come from the line of Vikram Malhotra with Morgan Stanley.
Morning, and thanks for taking the question.
Just maybe wanted to build upon our comments.
Common surround our strategic capital business, you referenced several times the power of the business and potentially being undervalued.
I'm, assuming on that and that's on the equity side.
As I talk to my colleagues, who will cover the asset manager and as you know theres clearly different multiples.
And that you know you you used to value some of these larger asset management platform. So maybe you can in fact as far as a little bit.
In terms of the power of the business the more focused.
Customer base, you are seeing that our focus on logistics only platforms and then just evaluation that'd be really helpful.
And bigger and somehow I will Oh I'll take that first so I think let's start with that business and how that business has grown and if you look over the last 5 years.
AUM and revenues for that business have grown 18% from 18% CAGR and more importantly.
The EBITDA or cash flow that that business is generating has grown by 26%.
CAGR, so incredible growth as we look forward just given.
And what we're seeing I think the opportunities for our there for very strong continued EBITDA growth. So I think that's that's a baseline I would think about.
There are highly highly scalable business for what we do and.
Relative to valuation there.
Think clarity around valuation and this business has never been better because theres been several transactions that have cleared the market lately and you can certainly look at public comps.
Think for US you need to look at the alternative asset managers is the right place to start and.
And while there are a lot of different ways.
I think analysts and investors are looking at multiples, but when you pour through it all for the alternatives and the comps were saying youre going to see multiples in the mid twenties on on earnings and those include promote so when you strip out promotes.
And Youre seeing for the best alternative asset managers.
Multiple 30 are higher and they're getting tenex on promotes.
So yeah that would tell you our business is I would say very undervalued because as youre thinking about how we compare to them I think you need to think about the stickiness of our AUM 90, plus.
Per cent of our AUM is on long life for war.
And perpetual vehicles.
We talked about the growth profile that we have and then clearly there's incredible investor demand for our product, which is also lining up to support growth.
Our equity queue at quarter end was $3.3 billion and all time high so happy to get into more discussions with you all on this going forward, but a lot of good visibility out there and valuation.
Yes, I would add I would add 2 things, which we.
We sort of assume that are important for the business has scale, it's a $60 billion plus business I mean that puts us.
And the top real estate asset managers anywhere by by any measure and we're focused on 1 property types. So that's a pretty significant market share in the most desirable markets. So that that's placed for the premium.
And also I would say we have the longest history of actually producing these returns you know that goes back to Amd's early days and are in the mid Eighty's. So both in terms of longevity. The quality of the income stream. These are not a bunch of closed end funds that expire.
These are these are as Tom pointed out very sticky and long life.
Cash flow streams I would argue that they have more leverage on the upside and then.
And the real estate cash flows that support that business.
And as of the fee and promote structure so.
For the life for me I don't really understand why they are being valued the way they are but but we're going to do a better job of explaining that to people who follow this business because we honestly getting a lot of receptivity.
From those investors that really understand this sector.
And our next question will come from the line of Jamie Feldman with Bank of America.
Thank you.
And following up to the last question and your $14 billion of investment capacity, we've seen a good amount of large portfolios trade. The last few years, but clearly pricing is getting more and more dear and how should we think about your ability to do large scale transactions to keep growing.
That business through acquisition.
We do not care, 1 iota, but external growth and through M&A.
Is that has no skill of the management team just multiple conversion and dismissed that's there that our size.
Prevents us from growing fast I would just invite people to look at the numbers and you can strip out the M&A from that so so M&A is opportunistic and for a part of our business plan and and if we never had another dollar of M&A all played out growth rate against anybody elses and and.
The sector, Frank frankly overtime.
Thank you and our next question will come from the line of John Kim with BMO capital markets.
Thank you.
Given the increase the patent valuations this quarter I was wondering if you could provide an updated view.
And on exit cap rates and that spread.
And exited and going in yields when you and your partners are looking at investments.
Well historically we.
Pennsylvania, and a 50 basis point used to pencil and a 50 basis point.
Increase in the residual calculation based on our rent projections and and the like but I think.
And 50 basis points when cap rates for 9% was quite a bit and.
When the cap rates are and the mid threes that's even.
A great deal more on a relative basis.
Mostly using about a 25% increase and residual calculations 10 years out, but again, we are and infinite life vehicle. When you invest in our range. You don't you know, we just sell non strategic assets, we don't sell our other assets that we like you look at the dividend or the cash flow that comes off those assets and the growth.
The rate of those assets.
That translates into a very nice overall, IRR, which is really the fundamental.
Driver of value and our business.
Thank you and our next question will come from the line of Jon Petersen with Jefferies.
Oh, great. Thanks.
And your press release mentioned that St cash same store NOI growth for the international and portfolio was higher than the U S, which I think is a kind of a flip from what we've seen in recent years, but I've looked at the occupancy. The occupancy you spoke it was still growing faster and the U S. So maybe you could just.
And I talk about what's driving that higher international growth.
Yes, Tom I'll take that I think part of it was driven by strong results and other Americas and Europe was also strong.
And I think it's more of a reflection of a easier comp.
And in Q2 of 'twenty than everything else, but listen I think longer term I mean.
By and large are particularly in Europe. The cap rates have dropped further and Europe over the last several years, that's been more of a headwind on rent growth and I would expect going forward and we're gonna see.
And there it's next year the year after that but we're going to see growth and our international markets be on par if not better than our U S markets.
Yeah, I would also say that land is very difficult and the U S. But it's even more difficult and Europe, because the government has a much bigger actor in allocating land out and they really tie it to employment and theyre not wild about logistics so.
Land and land supply is it just that much more difficult.
And our next question will come from the line of Blaine Heck with Wells Fargo.
Great. Thanks.
We noticed turnover costs on leases ticked up this quarter and those costs as a percentage of lease value have been trending up over the last 4 quarters as has free rent.
Just given the context of you guys, having the highest demand you've ever seen those those increase that increase seems somewhat counterintuitive. So can you just give some color on what might be driving that increase and and how we should think about those concessions going forward.
This is Tom it's a good observation what is driving that over the last 4 quarters and particularly in the and the second quarter as higher levels and new leasing so new leasing and Q2 versus Q1 increased 40% sequentially and new leases generally come with slightly higher concessions.
Slightly higher.
Turnover costs as a result.
And but the key is we're looking at long term economics, so, yes, theres a little bit of short term pain with that but we're getting in.
What we believe to be a.
Better cash flow and higher rents, but I think thats. The key we're looking at the long term economics here and we're getting that I do think and clearly over the last 4 quarters we've seen.
Much higher levels of.
New leasing than in the past I think that's going to moderate a bit going forward.
But.
We're looking at the long term and game here and.
It's clearly the right economic decision to make yes, and the other the other issue you should keep in mind is that we're pushing rents and a lot harder than and we were before so.
Likely to.
Replace existing customers.
With the most efficient the customers that have the highest value chain and the ability to pay so that reshuffle has been.
Accelerated and the last 12 to 24 months.
And our next question will come from the line of Michael Carroll with RBC capital markets.
Yeah, I Wonder if you touch back on the earlier comments regarding the broadening out of of tenant interest specifically from from E. Commerce players and I guess and Youre, saying youre seeing more demand from the smaller players or are these companies that are looking to in source their logistics needs versus outsourcing it to 3 pls are or do they already have and in store.
Network and Theyre, just looking to expand it right now or is it a little bit of both.
Hey, this is <unk>.
Mike, It's certainly a little bit of both and I think the bigger story here as we get asked a lot of questions about you know is it all about Amazon and while they've been very steady and robust robust in terms of their activity with us this year with actually plenty of back and activity coming up and the next couple of quarters, the bigger takeaway and here's what Tom said in the earnings front.
And here, where the other customers last year, we leased about 50 non Amazon.
50 leases to non Amazon and E. Comm players. This time fast forward a numbers 3 times as high and its a wide variety of smaller and larger customers and there's some big brand names and they're like.
Walmart Dot com or Mercado Libre, and Latin America, <unk> Dot com, but the bigger story is there's over 150 of these smaller and more diversified players using a combination of in sourcing and outsourcing we really liked that diversification there and again the story, it's just not all about Amazon.
I think theres, a frenzy of playing catch up debt.
That is creating and.
A lot of activity I mean, I think people if anything the pandemic sort of suggested that they can't take business as usual and they're very incremental approach with respect to their and e-commerce strategy and now they're realizing how important it is and they're just pedal to the metal and thats showing up and on a 3 PL leasing cost.
Mistakes as well.
And our next question will come from the line up for Mike Mueller with Jpmorgan.
Yeah, Hi, I can talk a little bit about your development margins on spec versus build to suit and do you think we could see the mix, which I think you said, it's about 40% this year drift down further.
Yeah, Mike This is Jim I think the I think that's going to hold.
In fact, I think we might see a.
Ultimately a higher build to suit percentage.
And I'd be I'd be careful looking at the <unk>.
Comparison of margins between.
Between build to suit and spec.
Because mix has an awful lot to do with it.
How long the transaction has taken to negotiate has something to do with it.
But I think in both cases, you can expect margins to creep creep up we have cost increasing on us.
On the construction side, but we have return compression and rent growth that's ahead of.
Our underwriting expectations and that.
Overwhelms the cost increase and so I think generally you're going to see margins expand.
Yeah.
And our next question will come from the line of Dave Rodgers with Baird.
And there maybe start with Mike or gene I wanted to ask on.
The inventory and the sales topics that you guys mentioned earlier.
The big increase in sales and inventory is not keeping up I guess when you talk to customers what are they trying to solve for from an inventory to sales perspective, and maybe how does that vary between industries if at all and.
And I guess, how do they take into consideration maybe interest costs with interest going down does that change kind of their willingness to carry even more inventory and the near term and those kind of type of conversations and any color would be helpful.
Hey, Dave, It's Chris Cade, and I'll I'll kick it off so first off as has been shared a few times right now its fulfillment by any means necessary trying to get goods into the country look inventories are down 10% from pre pandemic levels and so it's really just a race to get levels and as it relates to resilience I do think we're starting to see.
See this but I think the specific numbers and people are looking at they are not yet at the strategic planning phase are much more tactically focused on fixing their supply chains. This.
And this year, we're fresh off a supply chain.
Conference for days ago, 75 per cent of the people.
Spoke with their and pulse survey said, increasing inventories due to resilience related issues is top of mind and we're starting to see that play out.
And.
And our next question will come from the line and Vince <unk> with Green Street.
Hi, good morning.
I wanted to follow up on Snips significant increase in your U S market rent growth forecast and I just wanted to get a little more color on which markets youre seeing the greatest improvement and fundamentals and reviews last quarter and also just here how high are forecasting growth in southern California, and New Jersey and the likes.
Hey, Vince it's Chris cadence. So indeed, we did make a material increase and look I think the facts of the situation of really impressive rents and the U S are up nearly 7% just and the first half of the year. That's a record and look it's not just the U S rents are rising and Europe, they're up 2% so far.
This year.
And I think about different categories, let's start with the coastal the major markets on the coast and looks at and Toronto and Theyre typically these markets on an annual basis and outperformed by 250 to 400 basis points last year that compressed.
It was less differentiation that differentiation has returned and so we're going to see these coastal markets and Toronto hit mid teens I think this year and based on some of the trends. We discussed earlier I would say, we should expect to see this relative outperformance.
Widen and the coming years.
Hope that helps you.
Vince as Tom and I would just tack on the impact of.
And on our earnings rate I mean, we're rolling and announced 16 and 17% of our portfolio a year now. So that's good news on rent growth is not coming through the P&L right away. So you need to look at the in place to market, which significantly gapped out this quarter now at almost 17% and.
And as I said in my prepared remarks, thats, almost $700 million of incremental NOI.
And we'll have to see where rent growth continues to go but.
And would continue to think that in place and market is going to March a little higher.
Yes, and 1 other thing I would add.
And strongest strength have been and some of these.
You know the best markets with today's rents today's construction costs and today's land class development doesn't pencil.
So when people are developing that means they're thinking it may be wrong that rents have to grow quite a bit from here or cap rates are going to compress significantly from here I don't know, which and they may be wrong, but I can tell you that with today's marginal land plus and building for us.
No way you come close to declaring your margin and development.
And our next question will come from the line of Rob Simone.
<unk> risk management.
Hey, guys. Thanks for taking the question kind of a 2 part question for me it gets back to.
Your earlier comments on strategic capital.
Took a shot at that valuation and I think.
From your comments are really helpful. I think in many ways, we were probably too conservative but on.
On the on the growth rate side. So 1 of the things that's a little bit tougher to handicap when the outside.
Is this like kind of a sustainable growth rate and your capital raising the deployments from contributions as a little more.
From the numbers at least historically, so I was hoping you guys could comment on how you see the fund raising environment kind of proceeding over the coming years and then also maybe secondarily to that it's really interesting.
This is the first year.
Net income excluding promotes kind of subsumed Europe corporate G&A. So from a valuation perspective, how do you think about adjusting that it's obviously a huge benefit but a big chain for prior years.
Hey, Rob Let me, let me take a shot at this.
Todays.
Our third party AUM is mid sixties.
And at the time and that merger exactly 10 years ago. The merger closed on June 30 of 2011, exactly 10 years ago. It was 14th.
So you do the math and see what the growth rate has been but I think 10 years, it's got to be a pretty representative period, because we had some early not so great years, and industrial and past couple of years have been really good but I haven't done the CAGR, but if you do the CAGR between 2014.
And whatever 60 plus.
It's got to be pretty pretty impressive the guys are trying to do the math.
Any way you can do the math.
It's.
Certainly higher than what any valuation model would suggest and I bet you, it's higher than a lot of public company asset managers, it's 16% annual growth rate and third party.
Funds under management, so and the limiter on that growth is not our ability to raise capital. We can we can go out there and raise garbage more capital than we have right now. It's just that we don't want to raise the capital. If we think we don't have good deployment and opportunities for it. So we don't want our Qs getting too long and <unk>.
For us to get frustrated and we certainly don't want to have a big Q that forces a dealmaking like we see and a lot of other places we've raised somewhere between 2 and $6 billion of the capital over the course of the last 3 years, depending on need this year, you'll be interested to know that 60% of the new capital Thats raised is from new investors new to pro largest so.
That really underscores the broadening of interest and the logistics sector and the other thing that I think you're going to find interesting is at 60 per cent of the investors are now diligently same ESG.
As a as an imperative so that really plays to our strength, we've been and ESG leader for more than 2 decades. So I think that's a differentiator from PLD and Rob I'd. Just also point out for months you focused on equity raising but these are open ended funds are extremely low levered their a minus rated entities they have significant financing capacity.
So we've got a lot of runway just by using their balance sheets and much less ours and then thanks for pointing and hence your point about G&A and scale. It just tells you the power of the scale of this business as we talked about the AUM growth of 16 over the last 10 years or 18 over the last 5 years, but it's all about cash flow EBITDA, that's grown 26 per.
<unk> CAGR and the last 5 years and as we grow the vast majority of that money is going to drop to the bottom line.
And our next question is going to come from the line of Tom Catherwood V. P. I G.
Excellent. Thank you guys for me just wanted to follow up on your comment on industrial development not penciling out last quarter. I think you had mentioned that the replacement costs could increase by a mid then as much as 25% and that prolonged just had gotten ahead of that by pre ordering a lot of material including steel.
As we sit today and what are your current thoughts as far as input costs and how they could continue to trend and is there a timeframe in which you might kind of fully utilize the material you pre ordered and we could see maybe more margin compression on the development side is you have to pay kind of.
Market rates for those what are your thoughts on that.
Yes in terms of our pre purchasing scale.
Didn't want to create false impression that we've got our entire development program hedged on steel to us.
And we're pretty much for working through the snow that's been hedged. So I don't think Thats, a big factor in and forecasting margins going forward. My personal view is that some of these supply chain related issues that have impacted the material to us are going to subside and theres a period out there a year.
For 2 years out where maybe the steel price escalation could reverse and get back on and sort of normal inflationary trend once all the plants are back up and and producing.
But the most important thing affecting margins is what Jean mentioned, a little while ago, which is that cash.
Cap rates are compressing and rents are growing.
Foster that land cost and replacement for us are going up so the margins if anything.
And then expand.
Unless something material changes that I can't think of right now.
Particularly given the outlook for demand and.
And when someone asked Chris about the different sectors and all of that notably absent.
And his sectors was housing.
Housing is still not anywhere near its potential and it's a big consumer of warehouse space.
And that Hasnt, even kicked in and and you know how low their housing inventory is and how much prices are going up and the housing sector. So I expect actually that to be and then additional engine of growth for.
And for demand.
And our next question will come from the line and Kevin Kim with Truest.
Thanks, and good morning.
Wanted to go back to the land topic, you guys bought.
More land year to date than you did in 2020.
Just curious Paul just a couple of broad questions.
And you already have a pretty sizable land bank. So I'm just curious about what the thinking is behind that is it.
And so demand is so good that you had to kind of secure market value land to put it to work relatively soon or is there a longer term element to it.
I think the demand and is long lasting and so good that you wanted to replenish the land inventory.
And also.
How should we think about the $18 billion, both total and build out and your land bank today should we expect that to start to.
It gets smaller and you do more development or is this a level day.
You play and you can maintain just to keep things humming along.
Yeah, a couple of things and keep in first of all I have.
Comes in and couple of different flavors.
1 is raw uninspired of land of which we buy some but not a lot second comes in the form of options that we actually don't it doesn't show up in the period. When we made the deal it shows up in the period that we actually close.
And options. So I don't know the specifics for this quarter that youre looking at but we can find that out but.
It could be closing and options that we negotiated many many moons ago and finally.
And the infrastructure cost of improving land and shows up as land and it may not be actually new land and maybe just additional infrastructure and existing land for example, and our Tracy Park, we're doing millions of square foot deals like they're going out of style and along with that we need to put the infrastructure and.
And would that flow, we bought in 2012, but that infrastructure and it shows up as additional Atlanta finally.
And increasing.
Percentage of our land is covered land plays and they have and income stream and they pencil.
And as our investments, even if we weren't going to scrape them and redevelop them down. The road. So these are the diesel and land purchases yields that are actually pretty pretty attractive and their own right, but they also have and embedded upside in terms of developing new product on Jean anything yes. So even if you look at that.
18 billion and the build out about 44% of it.
And is either covered land plays our option land.
And if you look at how we are replenishing the land bank over time, we're sticking pretty much to those ratios. So nearly 50% of it comes from those 2 categories and with respect to the size and the land bank.
Got to grow our development program is growing and youre going to youre going to see the.
The land bank grow along with it yes.
Yes. Good example would be this hilltop transactions that got all this.
Attention and that's all of a sudden and I'm just going to the retail business, though and we're not going to the retail business.
And that's just another way of buying land with a yield on it so but and you know, it's chunky and so $100 million. So that shows up as that can move the numbers around any given quarter by quite quite a bit but it's a covered land play at the end of the same.
Okay.
Once again to ask a question. Please press Star then 1 on your telephone keypad and.
Our next question is a follow up from Jamie Feldman Bank of America.
Thanks, I just wanted and 2 quick follow up question.
1 is going back to supply chain shortages pleasantly surprised to see you raised your starts guidance and your stabilization and guidance.
Did you say that we will see that across the board and this sector or theres something specific about the PLD platform and <unk>.
Let you continue on with your development plans and then secondly, you had mentioned housing is not yet and its full potential for demand any thought latest thoughts and re shoring and what that could mean to demand and then anything coming out of Congress with the infrastructure Bill that could also be a driver of growth. Thank.
Thank you.
Yeah, and the infrastructure side.
Lot of it is and infrastructure vessels I can tell so I don't think those things are necessarily going to add a lot of.
Business, but the real infrastructure infrastructure for it.
Which is less and 1 billion should be really great for the business Onshoring is I only see onshoring and newspaper articles and I haven't really actually seen it seen them and if you look at the import numbers and we see.
And once after months of records and now I do think there will be onshoring of medical supplies and PPE and some of the things that that are strategic to us and over overused word, but generally speaking we just don't have the resources the infrastructure the labor day and know how to manufacture a lot of.
And the things that come into wood containers.
Yeah, I mean, I think you will see and in Mexico, we are seeing it but I don't think youll see reassuring here.
What was the first part of your question.
What we see others and.
Right right.
And a unique yes, I mean, we will find out and a couple of weeks.
Right.
<unk>.
I can tell you that and you've heard us talk about this for years now we've really taken the customer and put it in the middle of our business and that is paying dividends and so this customer centric model and allows us to do a lot of business.
The way that playbook will get copied like everything else. So.
I assume other people and same thing but.
But so far and we're doing great with with major customer business.
Thanks for the good work and that's it seems like.
With that Jamie you were the last so.
So thank you again for your attention and and we look forward to talking to you before.
For next quarter for sure and take care.
Once again, we'd like to thank you for participating in today's per lot. Just conference call. You may now disconnect.
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