Q3 2021 Prologis Inc Earnings Call
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[music].
Good day and thank you for standing by welcome to the Prologis partner three 2021 earnings conference call. At this time, all participants are in a listen only mode.
Ladies speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
You require any further assistance. Please press star zero, how do I like Jan to conference over to your Speaker today, Tracy Ward Senior Vice President Investor Relations. Please go ahead.
Thanks, Sarah and good morning, everyone welcome to our third quarter 2021 earnings conference call the.
A supplemental document is available on our website at largest 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 current expectations estimates and projections about the market and the industry in which provides us operate as well as management's beliefs and assumptions forward.
Looking statements are not guarantees of performance and actual operating results Navy affected by a variety of factors for a list of those factors. Please refer to the forward looking statement notice in our 10-K or SEC filings.
Additionally, our third quarter results press release, and supplemental do contain financial measures such as <unk> and EBITDA that are non-GAAP measures and in accordance with Reg G. We have provided a reconciliation to those measures. This.
This morning, we'll hear from Tom Olinger, our CFO, who will cover our results real time market conditions and guidance and also here with me today are Hamid mugger down Gary Anderson, Chris cable.
Tim or Mike Curless, Dan letter that Christine O'reilly and Carsten, how big a with that I will turn the call over to Tom and Tom will you. Please begin thanks.
Thanks, Tracy good morning, everyone and thanks for joining our call today.
Third quarter results exceeded expectations and were underpinned by record increases in market rents and valuations operating conditions are being shaped by structural forces that continue to drive demand.
At the same time vacancies are at unprecedented lows space.
Space in our markets is effectively sold out.
In the last 90 days supply chain dislocations have become even more pronounced with customers acting with a sense of urgency to secure the space they need <unk>.
As demand surges, having the right logistics real estate in the right locations has never been more mission critical to our customers.
During the third quarter, we signed 56 million square feet of leases and issued proposals on 84 million square feet.
Spaces above 100000 square feet are effectively fully leased.
Our last touch segment continued to gain momentum with new lease signings growing by 44%.
E Commerce requirements continue to broaden across a range of industries with this segment, representing one quarter of new lease signings.
<unk> was down sequentially as anticipated although remains above trend.
Given the sharp ramp up in demand, we are raising our 2021 U S forecast for net absorption by 14% to a record 375 million square feet against deliveries of 285 million square feet, resulting in year end vacancy, reaching a new low of 4% I want to point out that we revised our data set here.
This quarter to reflect only prolonged just markets.
A strong demand is being met with historic low vacancy pre leasing in the U S. The Liberty pipeline has reached 70% its highest level ever as customers continue to compete for space.
Acute scarcity in our global markets is driving record rent and value growth.
In the third quarter alone rents grew seven 1% in our U S markets far exceeding our expectations were.
We are increasing our 2021 market rent forecast significantly to an all time high of 19% for the U S and 17% globally, both up approximately 700 basis points.
Our in place to market rent spread jumped 500 basis points in the quarter and is now approximately 22% with an upward bias. This current rent spread represents embedded organic NOI growth of more than $925 million or $1.25 per share.
Record rent growth is translating to record valuation increases our logistics portfolio posted the largest quarterly increase in our history rising 9.5% globally, bringing the year to date increased to an impressive 4%.
An impressive 24% sorry about that we expect that the ongoing network reconfiguration and expansion required to meet consumer needs and minimize disruptions will fuel demand tail wins over the next decade.
Switching gears to results for the quarter core <unk> was $1.04 per share with net promote earnings of one set rent.
Rent change on rollover was strong at 27, 9% slightly lower sequentially due to mix.
Average occupancy was 96, 6% up 60 basis points sequentially, and we reached 98% leased at quarter end.
Cash same store NOI growth accelerated to six 7% up 90 basis points sequentially.
We had a very productive quarter on the deployment front margins on development stabilization has remained elevated coming in at 47%.
Our development starts were $1 $4 billion, consisting of 31 projects across 21 markets with estimated value creation of more than $520 million.
Turning to strategic capital our team raised almost $500 million in the third quarter and $2 $5 billion year to date equity cues for open ended vehicles were $3 $4 billion at quarter end, another all time high.
Moving to guidance for 2021, our outlook has further improved and here are the key updates on an our share basis, we're tightening and increasing our cash same store NOI growth to now range between $5 75, and 6%, we're increasing the midpoint for strategic capital revenue, excluding promotes by 12 and a half million dollars in <unk>.
Now range between 480 and $485 million.
We expect net promote income of five cents per share for the year, an increase of three cents from our prior guidance.
In response to strong demand, we are increasing development starts by $450 million to a new midpoint of $3 $7 billion.
Our owned and managed land portfolio now supports 180 million square feet and more than $21 billion of future buildout potential providing a clear runway for significant value creation over the next several years.
We're also increasing the midpoint for acquisitions by $500 million the increased pace of acquisitions relates to our focus on covered land plays and urban last touch opportunities.
We now expect net deployment uses of $650 million at the midpoint.
Taking these assumptions into account we are increasing our core <unk> mid point by <unk>, <unk> and narrowing the range to $4.11 to $4 13 per share.
Core <unk>, excluding promotes will range between $4, six and $4.08 per share representing year over year growth at the mid point of almost 14%, while deleveraging by more than 300 basis points.
We expect to generate $1 $4 billion in free cash flow after dividends.
A conservative payout ratio below 60% range.
While our year to date results have been extraordinary most of the benefits from the current environment will accrue to the future are 22% in place to market rent spread devaluation impact on promotes our leverage capacity for $21 billion of development build out and most importantly, the vast opportunity set that our globe.
Footprint provides all paved the way for both significant and durable long term growth.
As I mentioned at the outset of my remarks, the disruptions within the supply chain won't be solved overnight.
Our largest plays a unique role in the industry and we're committed to helping find long term solutions. That's why we're working closely with our customers policymakers and community partners to help address the problems, which range from warehouse space to.
Transport infrastructure.
It's a labor scarcity in closing I want to highlight two important upcoming for largest events first this monday will be hosting a webinar that will dive into our development and strategic capital businesses.
And second on October 27, we are bringing together supply chain and community thought leaders to focus on some of the most pressing issues and logistics today.
Polluting workforce energy and transportation please.
Please visit our website for more information and the registration links for both events and with that I'll turn it back to Sara for your questions.
Yeah.
As a reminder to ask a question you will need to press star one on your telephone until we try your question first turnkey.
And if he would like to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Caitlin Burrows from Goldman Sachs. Your line is open.
Hi.
Hi, good morning.
The earnings release mentioned that Youre investing capacity is around 15 billion do you think prologis will actually be able to deploy capital and use that opportunity and if so how do you think that spread could actually increase as cash flow increases.
Caitlin, it's as you know we.
Really never provide guidance at least voluntarily on deployment because.
As I've said many times it can range between zero and a lot last year. It was 21 billion. So I don't know honestly. It just depends on the returns that are available and the only reason we talk about capacity is that you sort of have a feel for what we can do if the right opportunities came about.
But theres no urgency around investing in it in a particular timeframe.
Your next question comes from the line of Emmanuel Korchman from C. I T. I hear your line is open.
Hey, everyone. Good morning, Tom.
Tom I kind of wanted to reconcile a point you made earlier in your script, which was that our customers are.
Keenly focus on getting more space and you know, we're reading a lot of headlines on shortages of us.
Inventory of labor of other things.
I guess help me reconcile the two points with customers looking for space that maybe they can't fill right away or they just expecting the supply pipeline to rebound quickly or are they moving stuff from other warehouses or sort of I guess, it's a little bit.
Hunter intuitive for somebody to be taking more space when product is sort of an issue right now sorry for long question. Thank you.
Yeah, Manny let me, let me try to answer that question. The supply chain is very long and it's gotten a little longer than the last 10 years. So basically what happened is think of it as a big long hose and somebody turned off the water and the hose ran dry and as the economies came back.
You know that.
Who's got it and then production started then it's not flowing through the supply chain. So it is not flowing smoothly and then old models for predicting demand and carrying inventory are basically thrown out the window, so inventory, particularly mid product inventory not finished.
Inventory sort of ends up piling up in different places because if there's one part missing into something it's going to hold up the inventory. The other 99 parts have to happen.
Be stored somewhere.
So it's creating.
Pretty significant extra demand just to balance out the system given that the buffers are not predictable anymore. So the natural follow up question from that I would guess would be well do you guys think about this being a one time event or a sustainable event and I would say this particular fab.
Actor is likely to be a temporary although probably two to three year type of process before everything straightens out.
But right behind that are the two big structural drivers.
That on top of normal absorption. They include increased share of e-commerce and inventory levels being higher than prior to the pandemic and those two things people aren't even thinking about it right now because they're they're struggling to keep their heads above water.
I think that short term thing is really interesting, it's great for headlines and all that but I think the much more interesting factor in terms of assessing the quality of our business is a long term driver are the two long term drivers of demand on top of the normal drivers over the bad.
The next question comes from the line of Tom Catherwood from B T. I G. Your line is open.
Yeah.
Okay.
Excellent. Thank you so much guys.
On cap rates, we've seen incredible compression this year.
And unlike prior years, it's really seemed to be across the board does that create any risk in certain markets or regions, where fundamentals of demand may not meet kind of the lofty valuation expectations. We now have.
Boy, that's a tough question to answer I'll give you mine and Gina I'm sure will have ideas about this first of all we didn't know tourist sleep at predicting GAAP rates.
Same for about five years that they were too low only to watch them go lower.
But remember our cap rates are a function of two things one is general returns available in other capital markets, namely interest rates or risk free rates.
And more recently the.
Rent growth and the growth growing power of that initial yield is.
He is orders of magnitude higher than it's ever been so I'm not smart enough to parse why cap rates are compressing I suspect it has more to do with deep embedded growth rate in the last six months than it does with interest rate picture looks like the interest rate picture, if anything has increased but.
The tremendous growth in France, I think has a way exceeded.
The drag from from slightly higher interest rates gene. What do you think yeah. I think you may be getting to the the spread between primary and secondary markets.
And you know that actually hasn't tightened up that much it has tightened up a little bit but.
You know spot cap rates in primary markets are extremely low so I think theres always risk as cap rates in secondary or even tertiary markets are dragged down.
By the overall strength of the market.
Because youre going to see more supply.
In those markets going forward against probably less less demand.
We'll see how it plays out but I I don't really say, Chris you may have a different point of view.
That those spreads have actually tightened that much further.
Okay.
The next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.
Thank you.
Get asked a lot about.
Just the potential supply coming online with so much capital flowing into the sector can you talk a little bit about whether it's a competitive moat or just kind of how prolonged this will.
We will be able to kind of protect itself.
Supply grows or maybe that's the wrong way to think about it just you know how should we think about the supply risk overall.
And it's not it's not so easy to build.
Yeah.
I think you should think of supply risk is very market specific and.
You can have all the desire to bring on supply in L, a or or San Francisco, or Seattle, or even inland Empire and in certainly inland Empire West or New Jersey take the I'll take all of your good markets.
I mean, how are you going to do it there is no land.
And their entitlement picture is getting to be harder and harder every day, even markets like Dallas that we historically would have discussed as or referred to as non constrained in terms of land believe it or not are getting more constrained Ah I still have entitlement constrained, but they're.
More constraint certainly in the good locations. So I think that the big driver is that it's just hard to come up with a land to build buildings on I mean supply is responding to demand, but I will I want my my gut feel.
And of course, you can't prove this one way or another is that demand would be higher supply were higher I think people are just just based on the number of people competing for the same good spaces and all the inbound calls we get from all of our good customers wanting to gain an advantage over another good customer it is our people.
Or kind of in a panic mode, almost when it comes to buying or committing to real estate. So demand is just crazy.
So Jamie I'd also add that it's it's market specific as it's actually sub market specific and in terms of how do we protect ourselves. We you know we do this all the time, whether its a strong market or a weak market, we're always monitoring where where is that supply going to.
Come from so I don't I don't think it really change our.
Protocols in that in that sense.
Yes.
Yeah.
Your next question comes from the line of Derek Johnston from Deutsche Bank. Your line is open.
Thank you hi, everyone.
In January on for Q twenties, earning call.
Your in place to market rent spread stood at 12, 8% and with that in place to market now at 22% just 910 months later.
What are the key drivers for this change in and really how sustainable is this mark to market across the portfolio.
Yeah, I'll take that so I'll anchor you back well first of all the increase is all driven to.
Hi market rent growth.
And I think as I mentioned in my remarks were almost 22% today and there is an arrow up just given we have very minimal role in the fourth quarter and given our market rent growth expectations. So I would expect the 22% is going to go higher.
When we're on this call in January.
One thing I would anchor you back to is you know at our Investor day back in November.
2019 that in place to market was 15, 5%.
And that was underpinning what we set our GAAP same store growth at that time was a three and a half to four 5% now here. We are today at 22% and when you think about that increase that really takes a three and a half to four and a half to almost four five to five and a half. So that's the that's the impact we've really extended.
You know here, we are almost at two two years later and it's up dramatically and our runway is arguably gotten even longer so.
The underpinning of the organic growth potential that we have is sitting right there.
For you to see.
Yeah. The only thing I would add to Tom's comment is actually land prices in most markets are going up faster than rents and construction costs are going up faster than rents so actually.
Rent required for that marginal square foot of supply is ahead of the 22%. So that's why the arrows.
We're running but sort of standing still or going a little backwards with respect to keeping pace with replacement cost.
Your next question comes from the line of Kevin Kim from tourist your line is open.
Thanks, and good morning out there.
So wanted to talk about your development pipeline, it's obviously grown very nicely to a $5 billion can you remind us.
For the heart costs like how much of the costs are hedged or.
At least the material secured two option options and as those expire and the favorable vintage of those hedges expire what kind of impact does it have to your.
Future development in terms of margins or yields.
So keep them and we we are.
We think we've contained about 25% of the cost increases we've seen to date.
So in the ER.
You know in our pipeline.
And in terms of the starts going forward.
Probably.
There's probably 4% sitting there that's beyond the underwriting of those projects.
Most of that is going to be picked up in contingency.
But as we look forward.
We don't really see see risk I'm not going to get into into the details of what we've done.
With pre buying steel and other components on the on these projects.
But I think we've mitigated quite a bit so far we do see these markets kind of stabilizing at this point in time.
And the other thing that we've done which is really critical is we've we've maintained our schedules.
And I think today I think we've picked up 30 days of schedule versus the market.
And frankly, we build these buildings faster than the market anyway, but that's an incremental 30 days. So the supply chain disruptions arent just cost there their schedule. So I think you're I mean, ultimately you're getting to how much have we sort of mitigated.
I've told you what have you done so far.
We're probably out you know probably six months ahead of the curve, but you can't really get much further than that so.
I feel really good about what we've done this year and I feel like we're prepared really well.
Going forward so.
We feel good about the about the outlook and obviously, we're raising guidance.
In our in our volumes.
Yeah, I think more importantly than hedging.
<unk> cost is the fact that rents are going up faster.
And then some of these costs are in if you've taken over all average and certainly in the in the best markets. So that's why margins are expanding with cap rates being being.
You know.
Also compressing so.
So far so good will it continue forever probably not.
And next question comes from the line of front outcome them from Morgan Stanley. Your line is open.
Hey, congrats on the quarter just a quick one on just retention shooting up 650 basis points year over year or any any Colorado.
Rove that tenant specific geographic just curious there thanks.
Nothing nothing unusual about mix or geography, but as we said customers don't have options really a lot of places to go and I think there's a race to secure really good well located real estate and that's what we're that's what we're saying.
That number can be very volatile quarter to quarter.
Honestly I wouldn't pay too much attention to it.
Over a quarter.
Your next question comes from the line of John Kim from BMO Capital markets. Your line is open.
Good morning, I was wondering if you can comment on how you see occupancy trending with your leased rate now at 19%, but you're also pushing rents harder.
And also if you can comment on the big sequential increase in occupancy in Asia during the quarter.
Occupancies have to go higher I mean, if your demand is 300 and whatever 85 and supply is 285, there was 100 million feet, that's going to come out of somewhere and add to that.
The lessons the significant amount of product that it's taken out of circulation because people built something else on it like apartments.
I think for sure a vacancy rates at least in the markets we care about.
Are gonna be going down in the foreseeable future.
In the long term.
We.
We need to see.
I don't expect 385 million square feet of demand being the new norm forever.
Because some of it is just people being desperate for putting putting their stuff somewhere.
But the but I think it will stabilize at a higher level than historical because of those two unique drivers that we're seeing in this cycle that we didn't have in other cycles.
And John your question on Asia, that's being driven by China, just we've seen some good very good lease up activity in China and Japan.
Haynes extremely high.
Occupied.
Our new team in China has done a really great job.
Yeah.
Your next question comes from the line of Craig Mailman from Keybanc capital markets. Your line is open.
Hey, guys.
Just curious on the you know the rent growth piece of things you guys have talked a lot about today, but is there.
A chance in your negotiations are you guys trying to push escalators higher as a way to combat.
Combat potential inflation here in the near term and just.
Maybe smooth.
Smooth out some of the rent increases from these times they have seen all of the the big sticker shock at the end of the lease.
Right well there is there's a variety of rationale for that but escalators or more.
Moving up where we're pushing them everywhere as you can imagine.
But as importantly, the markets.
Are accepting this and in the competitive landscape is doing it.
Perhaps partially for the reasons that you mentioned to smooth that effect with the customer.
But of course, a lot of our customers going to straight line it anyway.
But I think it's just a it's it's part and parcel with overall net effective rent.
Rent growth.
Feel pretty good about that.
The next question comes from the line of Steve Sokoloff on Evercore ISI. Your line is open.
Yeah. Thanks, most of my questions have been asked but I just on the development increase I'm. Just wondering if you could maybe talk about regions kind of where you're seeing the most demand and if you kind of thought about spec versus build to suits I mean, given your commentary about customers. How do you sort of see that trending moving forward.
Yeah. This is Steve I'll take the first part of it. So we got about 100 projects. We're starting this year. So it's it's really broad based and I wouldn't say that the increases are targeted to certain areas. Because frankly, we have so much demand and all the markets, where we're pulling forward.
Projects that we can number one and number two.
A lot of this increase is build to suit activity and maybe Mike can comment on that Steve.
Installed in the US up 60 per cent of activity was build to suit that that'll normalize ended the year in the mid Forty's, but I remind you that's going to be at a much larger base, which is representative of two basic things, there's fewer spec opportunities for people to move into and that's paired up with major structural rollouts that are well underway with a whole lot of companies.
Over and above Amazon, So we see a bunch of diverse activity there and no surprise margins are as solid as they've ever been reflective of how important entitled land sites are and again and the dearth of available space out there is putting us in a really good spot on Cogs.
Your next question comes from the line of Brian <unk> from UBS. Your line is open.
Hey, guys, so with the shortages of certain items in the supply chain, how is that impacting your procurement programs for tenants for things like forklifts lighting's rack et.
Et cetera, and also how are your tenants management labor challenges against the backdrop for record demand.
Yeah.
Yeah, certainly there's delays in some of our essentials projects as well forklifts racking those sorts of things so OEM manufacturers and those businesses are also struggling.
So lead times are longer but we're using again are leveraging our scale just as we do on the construction side of the business to procure them quicker than they otherwise would be able to.
On the Labor front do you guys want a gentle man.
Clearly our labor is on the minds of a lots of our customers and we're seeing them getting creative on how they're attracting labor and you see the commercials for lots and lots of companies on TV, what theyre doing there. It's also having them focus on.
More on automation and we're seeing plenty of discussions about automation and automation. These days is not the old version of it where it's fixed bespoke.
Seeing lots of flexibility out there in terms of a.
Robotic forklifts and autonomous worked with some of those types of things, which we think our buildings are very well suited because the primary criteria for that is a good floor and we spent over 30 years, making sure. Our floors are in really good shape. So we think we're in real good shape to addressed automation, which I think will be a function of this labor issue going forward.
Yeah.
Your next question comes from the line of Mike Mueller from JP Morgan Your line is open.
Yeah, Hi, Tom you've previously talked about the base case annual promote levels, how does that change for where cap rates have moved to today.
As a reminder, we talk about call. It seven cents of annual promotes a few net promote income if you go back and you look at our historic.
Performance, clearly given where valuations have gone I would expect 2020 to promote to be substantially above our historic run rate now clearly well, we'll talk more about it in January but directionally, that's what you should expect.
Yes per months are pretty levered on the on the upside because once you pass the pressed return that.
That incremental unit of return produces promote.
Whereas getting up to you prefer at the rates you are not getting any promote so it for.
For sure it will it will expand non linearly.
Your next question comes from the line of Anthony Powell from Barclays. Your line is open.
Hi, Good morning, a question about the building acquisition guidance that that didn't increase.
Increase there talked about covered land plays you know last touch how competitive is the environment for acquisitions, there and how are cap rates trending for those types of deals.
It's a it's very competitive for last touch there's there's no no question.
And cap rates are.
Tough to talk about because you have you have in place rents you're capping income that's literally all over the place. So I'm not sure it's that constructive to talk about the cap rates, but it is competitive.
I think we have a strategic advantage in the markets, we want to be in because we've been doing this now for.
Three or four years. So I think we I think we have scoped out the us the sub and sort of micro markets are pretty effectively but it is.
It is competitive in and Theres a ton of demand there and that's that's not going to change.
The yield on our covered land place the entire portfolio covered land plays which is about a quarter of our total land base is about 5%, which means that we're actually getting better yields on some of these covered land plays I know some of it historically and rents have gone up.
A lot, but yeah, but.
5% is pretty good are you getting paid to wait and that's the way to carry land I mean, the weight to carry lands, it's covered land plays and options and and really the one land. That's just sitting around there. That's the most expensive way of carrying land. So we've been on to this strategy for a long time.
And we have a good base of covered land plays that are now sort of cycling through development. So a lot of our development.
One month to 24 months is gonna be building out on the covered land place, but the good news is we were replenishing that inventory.
And then some as we chew through it.
Yeah, just to add onto it Hamid said, so we have about 180 million feet of F. A R. Buildout on our land bank option land and covered land plays combined.
So with the income flowing to the covered land plays we have about a 2% stabilized yield for the entire land bank, including all three components of it.
And after you pay taxes.
Still in the plus so we're kind of carrying this for free and.
You know frankly, some of the some of those those income profiles on.
On the early covered land plays or you know have a serious up arrow to them.
Another way to think about our land exposure.
Okay.
Your next question comes from the line of Michael Carroll from RBC capital markets. Your line is open.
Yeah. Thanks, so could we see leasing activity or demand improve as these supply chain disruptions dissipate and inventory levels improve or are customers. Just looking through these problems right now and really trying to build their logistics network that they need over the next three to five years.
I think they're doing both but I think most people are focused on.
That's dealing with Christmas I mean, literally they shouldn't be thinking about the long term and people are some of the larger more sophisticated players are.
And those would be the targets of the world home depots of the world people like that but but there are lots of people just trying to survive. The next three or four months. So I think that crazy Crunch will diminish over the next two to three years for sure.
But I think then they'll turn to the longer term strategies and I think that one has legs for a long time.
Yeah.
Your next question comes from the line of Dave Rogers from Baird. Your line is open.
Yeah. Most of my questions have been answered, but I did want to just follow up on the labor point, obviously labor a big concern today 400 million square feet of additional demand it's kind of in the last four quarters alone are you seeing customers, just making different decisions on location campus settings, whatever it might be related to kind of longer term labor.
Turns notwithstanding kind of the technology or are you just seeing kind of imminent decisions that are changing due to labor.
People have to figure out where their customers are and the networks are based on where the customers are.
And real estate and real estate costs.
And 3% to 5% of the total cost and by the way that number hasn't gone on gone up because of rents going up because the other components labor transportation and energy are also going up so they're.
They're not going to optimize around real estate costs theyre going to optimize around you know where their consumers.
Or and how long it takes to get them their what they want and it's mostly time not cost so they're going to have to operate in the big markets I mean, youre not going to go into the middle of a square stayed in the middle of the country because real estate rents are cheaper to service.
The desirable markets, where a lot of the growth is.
It's not a cost thing.
Your next question comes from the line of Nick Helical from Scotiabank. Your line is open.
Thanks, I just wanted to follow up on the leasing market and you know and particularly the three P. L marker, which which has been incredibly active year to date can you just talk a little bit more about the trends you're seeing there I imagine you know well we've heard anecdotes of like increasingly maybe Amazon using that market, because it's easier to get space on a real time basis and any.
<unk> would be very helpful. Thanks.
Yeah. This is Mike and Threep deal activity was up 500 bps last quarter.
And we've seen this really play out over the last several years, where three pls Marta viewed space, there's a bit of a commodity many years ago today. They are viewing it as an offensive weapon to help accommodate their customers and we're seeing this play out in the form of them leasing more space than they have underlying customers lined up or because they need that space to the track.
The customers and we're seeing them go for a longer term leases both of which are good signs of health.
This business in a whole lot of that is driven by the E. Commerce segment, which continues to be very diversified wet way over and above just Amazon. They are definitely committing space ahead of having customers, but they are definitely filling up those big spaces. This is not 1999 or 2000 dot com where people are going.
And I'm, hoping that their business will triple.
Can't keep up I mean literally that's the takeaway for all you guys, who can ask asking about it.
15 different ways, but the market cannot keep up.
With the supply market cannot keep up with.
The demand that's out there.
Yeah.
Your next question comes from the line of Blaine Heck from Wells Fargo. Your line is open.
Great. Thanks, I wanted to touch on the acquisitions in general not just specifically on the covered land plays as he touched on those earlier.
You guys were able to do just under $400 million at your share during the quarter at a 5% cap rate and you increased guidance pretty significantly can you just talk about what caused that cap rate on deals during the quarter to be higher than we've seen in a while is that just a mix issue or are you guys finding more opportunities.
We acquire off market and then related to that what's giving you the confidence to increase acquisition guidance when there's so much capital out there chasing deals.
Yeah. So the 5% is definitely a mix issue, but our acquisition activities.
We're generally not out there to buy core portfolios with the highest.
And hit their highest bid so we're constantly sourcing deals off market and yes, those do come with a better returns 5% is a is a mix issue with respect to the confidence in the future I mean frankly.
Hamid said earlier on.
Sure.
We had a $330 million quarter.
We might have a $2 billion quarter, we might have we might have a zero.
It really depends on what what what's out there what's available to us and you know we have confidence in the next quarter, because we have a lot of irons already in the fire, but confidence long term.
You know who knows I mean, if if these if these returns you'll begin to completely blow out over replacement cost.
You're not going to see us active.
Yeah, if there's a strategic opportunity we may have a quarter. That's 10 times a quarter. We had there. So it's tough acquisitions are hard to hard to forecast it.
It would be hard to forecast frankly, if somebody gives you a precise forecast breakfasts.
Hello.
But there's also another two I think important differences between us and others first of all are playing.
And is the globe.
And and that's lots of different ways to deploy capital then just in the U S. Now.
I'm not saying by the way Europe is any easier, but I'm, just saying, we have really multiple ways of deploying capital.
Secondly, a lot of the incremental capital that's come into the business is from allocators is from people that basically go out and buy existing product and we can be.
By sub standard product, that's well located and fix it and that even though there is competition in that too, but the number of players in that fix it market hasn't grown as much as the number of marquee players in the you know I buy office buildings, the malls today and now I'm gonna by warehouse, because it's cool so.
That's a that's a difference.
Yeah.
Your next question comes from the line of Jon Patterson from Jefferies. Your line is open.
Great. Thanks.
Just curious for your thoughts on you know maybe some of the structural headwinds that a lot of kind of the coastal gateway markets are facing particularly in New York and San Francisco, Obviously people are being called back to the office, but a lot more kind of flex.
Flexibility and kind of expectations of migration more towards lower cost markets lower taxed markets and I'm, just kind of curious how that impacts the industrial sector and your I guess willingness and underwriting around developing and expanding in those markets.
I think if I.
I'm honestly heard this wishful thinking by the part of people who are in other regions of the country now for probably 20 years and every time you've invested on the basis of that thesis you've left money on the table. So I don't see it yes are they high Elon Musk moving from California to Texas, Yes.
Does he get a lot of headlines, yes, but he doesn't consume any more than somebody who make 60 Grand a year. So they the big consumption basis are in these markets and the land is covered with buildings. Those are the difference is the fact that they're sitting next to a beach that's not so important it's just that those populations.
Are still growing they took a pause last year, but they're still growing and there's a lot of the vast majority of the movements are in the same region from maybe the urban core to the suburbs or something like that I mean, there's a lot of data on this and and maybe Chris do you want to elaborate on this.
So in terms of the distribution business. We don't have buildings that are in different places for for servicing the urban core versus the suburbs Theyre all sort of within the same driving area.
Just had a couple of data points for you first the business has never been stronger when we look at California, New Jersey business is excellent both from a demand perspective, and a pricing perspective as you look at real time migration data.
Specifically talking about the U S. P. S data you've seen migratory trends dissipate that has slowed down so it does not continuing it is not accelerating and if you look at other real time data. For example, the housing you also see the same trend. So just a couple of data points to reinforce the point that he's making.
By the way it doesn't again, let's let me just say this.
It's not like California's and have problems or New York doesn't have problems. They do have problems and they need to solve those problems and they need to become more business friendly and they need to improve the quality of life and homeless less is a real issue in all of those things are real issues, but at the end of the day people go with the job growth is and that's where the job.
Yes.
Yeah.
Again, if he would like to ask a question press Star then the number one on your telephone keypad.
We have a follow up question from me. Meanwhile, Korchman from Citi. Your line is open.
Thanks, everyone.
Chris one for you in the past you've talked about how much logistics. It is as a percentage of sort of overall, whether it be product cost our distribution cost.
Has that just essentially stayed consistent power and the rise in rents is consistent with the rise in other costs.
And at some point does that relationship that messed up either with rents, becoming a bigger piece or or the other costs are becoming a bigger piece.
Hey man Yeah, it's our assessment that right now that ratio has not changed and so for those who are not familiar with the data.
Rand is roughly 5% of supply chain costs and supply chain cost roughly 5% of revenue. So ran is about 25 basis points so throughput distribution.
With the growth that we've seen in transportation cost of growth. We've seen in labor that has in fact in excess of the market rent growth and so that ratio has not meaningfully changed if anything it's gone down a bit.
Yeah.
We have a follow up question comes from the line of Kevin Kim of Truest. Your line is open.
Thanks.
Question for you.
Your market cap is now over $100 billion mm.
Obviously grown a lot over the past several years and when you think about the mental math that you do in terms of the economics to get from contributing developed assets into the fund.
When you were a smaller company I mean, obviously that math works out very favorably as they get bigger I wonder when do we hit that point, where you would want to keep more of your development on balance sheet versus.
Contributing to the funds at the same pace.
Yeah, we don't I actually don't think that math unnecessarily ever reaches that point keep in I think when we think about it.
The reasons for being in the private capital business, our beyond scale I mean, there are mitigating currency exposure, it's leveraging the return on our capital etcetera, etcetera, and we've got a good history and a good brand in that business. It's a very important business to us and we'll continue to do that.
A meaningful way, but the.
The key to our growth is not external growth now we've done more external growth than anybody on the planet, but our key is not external growth. The key is internal growth that comes from portfolio construction and that comes from 2030 40 years almost of meticulous.
Yes.
Steady work to build up these positions and that's what's going to really in the long term.
Drive earnings in this company and create value D deployment is great that's interesting.
And that enables us to to get scaled that drives down G&A ratios and creates value that way it increases our liquidity, which reduces the cost of capital. It does all kinds of things, but at the end of the day. It's those location selections like look at all our four or five M&A deals.
You know some of them.
Between the.
Five of them we've sold.
Probably 30%, maybe 35% of the assets because we just don't leap in those markets. We've kept the ones that we want we caught up by the way probably need the right short term decision would have been to keep those assets because cap rates have compressed suite.
Knowing what I know now we should be more levered and <unk>.
And and have owned those assets, but frankly that doesn't set us up as well for the long term.
You know, where we will make that up and then some in the long term by having the portfolio in the right place so organic growth and the external growth as icing on the cake.
Okay.
Your last question comes from the line of Jamie Feldman Bank of America. Your line is open.
Thank you it looks like you guys.
Keith a meaningful rent growth in Europe can you talk about how your ability to push rents there compares to what you're seeing in the U S and if there are certain markets that.
You know are doing better than others.
U K is like the best markets in the U K and the continent is like the average margins in the U S minus 50 basis points.
That's the way I think about it I mean that may not be.
But in terms of rental growth.
The average of the content that is probably lower than the average of the U S. Today, but the cost of capital is lower in the U S and Europe also compared to the U S interest rates are lower so I think they all make sense in the context of the cost of capital, but U K is more.
Coastal U S. Like in the continent is more like the rest of the U S.
Okay, Jamie I think you you're the wrap so really appreciate everybody being on the call I think I think we had about 780 of you on the call today, which is got to be a huge record. So I really appreciate the interest in the company and look forward to talking to you in the next couple of months take care.
This concludes today's conference call. Thank you for your participation human now disconnect.
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