Q4 2021 Prologis Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the pro largest Q4 2021 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, we will conduct a question and answer session.
If you'd like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. It is now my pleasure to turn today's call over to Jill Sawyer Vice President of Investor Relations. Please go ahead.
Thanks, Brian and good morning, everyone I'm standing in for Tetra Tech.
Welcome to our fourth quarter 2021 earnings conference call. The supplemental document is available on our website at <unk> Com under Investor Relations I'd.
I'd like to state that this conference call will contain forward looking statements under federal Securities laws. These statements are based on current expectations estimates and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions.
We're looking statements are not guarantees of performance.
Actual operating results may be affected by a variety of factors.
For a list of those factors. Please refer to the forward looking statements notice in our 10-K or SEC filings.
Additionally, our fourth 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.
Hamid <unk>, Gary Anderson, Chris Caton, Mike Curless, Dan letter.
<unk> gene Reilly and Colleen Mckeown are also with US today with that I'll turn the call over to Tom family interest again, Thanks, Jill Good morning, everyone and thank you for joining our call.
Fourth quarter closed out a year of record setting activity across our business.
<unk> was $1 12 per share with net promote earnings of five.
For the full year core <unk> was $4 15 per share with.
With net promote earnings of six cents, excluding promotes core <unk> grew 14% year over year.
Net effective rent change on rollover accelerated to 33%.
510 basis points sequentially.
And was led by the U S at over 37%.
Average occupancy was 97, 4% up 80 basis points sequentially.
Cash same store NOI growth remained strong at seven 5% for the quarter and six 1% for the full year.
I want to point out that we're modifying our in place to market rent disclosure to standardize this metric among logistics rates. This collaboration is an extension of the work we've done to harmonize other property operating metrics.
We have to collect what we defined net effective lease mark to market of our operating portfolio as the growth rate from in place rents to market rents.
This now aligns with how rent change on rollover as expressed.
Using this new definition consistently applied our net effective lease mark to market at year end jumped almost 800 basis points sequentially to 36%.
This current rent spread represents embedded organic NOI of more than $1 $2 billion or $1 55 per share that we will capture without any further market rent growth.
Turning to strategic capital. This business continues to drive tremendous growth and value in Q4, we completed the early wind up of our highly successful U K L V venture.
<unk>, one $7 billion of operating assets were contributed to our pulp and pulp ventures.
We earned net promote income of five cents in connection with the close out of this venture and our percentage of infinite life vehicles has consequently grown to 95% of our $66 billion of third party assets under management.
For the year, our team raised $4 $4 billion of third party equity.
After drawing down $1.9 billion in our open ended funds for acquisitions during the year equity cues stood at a record $4 billion at year end.
On the deployment front, we had a very productive and profitable year.
Development starts totaled $3 $6 billion with margins of 32%. We continue to maintain a long development runway with a land portfolio able to support $26 billion of future starts.
Stabilization is totaled $2 $5 billion with estimated value creation of $1.3 billion and average margin of 53% both all time highs.
Realized development gains were $817 million for the year also an all time high.
These results are the product of our highly disciplined team and an incredibly strong operating environment.
For our customers the importance of the health of their supply chain and the real estate that underpins. It has never been so critical we believe the current global supply chain challenges will continue well beyond this year.
Fortunately the scale of our 1 billion square foot portfolio puts us in a unique position to help our customers address these current supply chain challenges. This.
This includes shortening construction delivery times by navigating raw material shortages and leveraging our essentials platform to procure warehouse equipment and services. So our customers can focus on their core operations.
We're also investing in technology and talent to support our industry, leading sustainability objectives, including our efforts around renewable energy.
Market dynamics today are highly favorable and demand has never been stronger.
During the quarter, we signed 62 million square feet of leases and issued proposals on 90 million square feet.
Demand is diverse across a range of industry and customers.
E Commerce made up 19% of our new leasing this quarter with further broadening of customer diversity.
We signed 357, new leases with 265 unique e-commerce customers in 2021.
Both of which are high watermarks.
Demand is fueled by three forces.
First overall consumption and demographic growth require our customers to expand.
Second customer supply chains are still repositioning to address the massive shift to e-commerce as well as preparing for higher growth and service expectations.
And third the need to create more resiliency in supply chains.
The inventory to sales ratios are more than 10% below pre pandemic levels, our customers not only need to restock at this 10% shortfall.
But build additional safety stock of 10% or greater this.
This combination has the potential to produce 800 million square feet or more a future demand in the U S alone.
Collectively these forces have placed a premium on speed to market and flexibility.
Driving demand for years to come.
From a supply perspective construction underway in the U S is approximately 70% pre leased which is well above the historical average we believe demand will balance out with supply in 2022 and vacancy rates will remain at record lows in both our U S and international markets.
Competition for limited availabilities produced yet another quarter of record rent and value growth.
In the fourth quarter rents in our portfolio grew five 7% globally and six 5% in the U S, bringing full year growth to records, 18% and 20% respectively far exceeding our initial forecast.
This growth paired with continued compression in cap rates is translating to record valuation increases our portfolio posted its highest quarterly value increase.
More than 12, 5% globally, bringing the full year increased to a remarkable 39%.
Now moving to guidance for 2022 here are the components on an our share basis.
We expect cash same store NOI growth to range between six and 7% and average occupancy to range between 96 five to 97, 5% we.
We are forecasting rent growth in our markets to be 11% in the U S and 10% globally.
For strategic capital, we expect revenue excluding promotes to range between 540 and $560 million.
We expect net promote income of 55 per share for the year.
Almost all of which will occur in the third quarter and is driven by our pelf venture.
While our record given the significant increase in rents and valuations, we would expect to see similar or higher promote levels in 2023.
In response to continued strong demand we are forecasting development starts of four $5 billion to $5 billion with approximately 35% build to suits disc.
Dispositions will range between one five and $1 8 billion two thirds of which we expect to close this quarter.
We're forecasting net deployment uses a $2 $3 billion at the midpoint, which we plan to fund with $1 $6 billion of free cash flow after dividends and a modest increase in leverage.
We project a core <unk>, including the 55 <unk> of net promote income to range between $5 and $5 10 per share representing 22% year over year growth at the midpoint.
Core <unk>, excluding promotes will range between $4 45, and $4 55 per share for year over year growth of 10% at the midpoint.
Since our Investor Forum in 2019, our three year earnings CAGR has been 13% excluding promotes well ahead of the 8% to 9% CAGR forecast, we originally provided.
Before closing out I want to spend a minute on the quality of our earnings drivers and Differentiators, which set <unk> apart from other real estate companies.
We continued to drive strong organic growth and arent reliant upon external growth to achieve sector, leading results in fact, approximately 75% of the increase to our core <unk> for 2022. Excluding promotes is derived from organic growth principally same store NOI and strategic capital fee related earnings it is.
And to point out that in 2022, our strategic capital revenue, including promotes will be over $1 billion.
A new milestone this high margin business generates very durable fee streams with asset management fees marked to fair value each quarter, all while requiring minimal capital.
In addition, we see growing earnings from our Essentials business, which allows us to expand our services and solutions beyond rent. When we introduced this business back in 2018, we set a target of $300 million from procurement savings and essentials revenue, we will hit that target this year with more than $225 million from procurement.
And $75 million from essentials.
In light of our success with success with procurement and the fact that we have embedded this initiative into our platform. We will not provide specific procurement reporting going forward instead focusing on essentials.
We also have a long development runway of $26 billion much of which comes from our international opportunity set positioning us for continued strong value creation well into the future.
Lastly, these differentiators are all underpinned by the lowest cost of capital among Reits and unmatched scale that minimizes operating costs.
In closing, while 2021 was a year of many records the bulk of the benefit from the current environment will be realized in the future providing a clear tangible runway for sector, leading growth for many years to come we are confident our best years are still ahead of us.
With that I'll turn the call back to the operator for your questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad and Jane in the interest of time. Please limit yourself to one question should you have a follow up please re queue.
Your first question comes from the line of John Kim with BMO capital markets. Your line is open.
Thank you I wanted to ask if you could provide some color.
On the yields on development starts, which compressed 50 basis points sequentially this quarter.
I am pretty sure that this does not include the uplift in market rental growth of 10% expecting this year, but I just wanted to double check thats. The case, but also I was wondering how you view development yield and cap rates trending this year in a rising rate environment.
Yes. So the answer your question is yes.
We have not included.
Forecasted rent so we underwrite based on what we see.
C. Currently so we're you know in this environment, we're seeing.
Returns compress.
You should expect to see some compression in the development yield now mix also has a has a lot to do that with that and Thats something we can we can check out and maybe get back to you guys in the compounds.
In terms of cap rate trends I don't think you want to pay any attention to our forecast since we have been consistently wrong for the last five years.
Okay.
Your next question comes from the line of Emmanuel Korchman with Citi. Your line is open.
Hey, good morning.
In terms of your ramping start guidance and commentary from.
Lots of other competitors in the logistics space.
When should people start worrying about the amount of supply coming.
And maybe maybe an easy way to answer it is how much of <unk>.
It starts are pre leased.
Or do you expect to get pre leased over the next couple of months and sort of assuage that supply issue.
Well I'll start and Chris will have some some data for you too many.
I think every year, we are all forecasted.
<unk> exceeding demands and we yet have to see that happen after the global financial crisis.
Will happen in some some year.
Just don't know, whether it's this coming year or some other year, but I've never seen 70% pre leasing and 40 years of doing this and the development portfolio and also the interest in build to suits I think it's a pretty good indication that the product just isn't there and I'm willing to bet. This is counterfactual, but im really.
Tibet, if there were more supply there would be more absorption of more demand people simply cannot get the space that they need.
But but I think it will be several several years and the other thing you need to pay attention to is that overall supply numbers are interesting, but our portfolio is very differentiated in terms of the markets high barrier markets that our portfolio lives in and let's not forget about overseas because the dynamics.
Overseas in terms of supply are very different than they are in the U S. So I think it's a complicated soup im not trying to avoid your answer but that's not on the first page of my worry list.
It will be at some point, but it's not.
This year and I don't think its going to be next year, Chris Yes, sure Manny So the numbers for this year look very strong market environment, and 375 million to 400 million square feet of both delivery and net absorption in our 30 markets that will leave the market vacancy rate at an ultra low all time record three 4% three 5% vacancy so very low.
Now this is especially true in our global markets, where we have an overweight strategy.
Those markets the under construction pipeline is just 3% of stock and a 70% pre leased 2021 net absorptions. So demand was 14% higher than that under construction pipeline by comparison, our regional markets have for 8% of their markets under construction. So our global markets are 180 basis points.
<unk> 2021 demand net net absorption was 12% below this under construction pipeline in the regional markets. So our global markets are 25%.
25% better.
Yes.
Your next question comes from Jamie Feldman with Bank of America. Your line is open.
Great Thanks for that color.
Just as you think about when supply chain well first the first question.
Or are we or how much longer before you think supply chain east, Texas some of that but I guess, even more importantly is thats, probably impossible that Ted pick a date.
What is warehouse demand look like when supply chain.
To smooth out.
No.
The type of demand that.
<unk> outlined the different categories of demand.
When supply chain some of that how much of that goes away.
Okay.
Thank Tom answered your second question, but let me let me take another stab at it.
We know this is the fact that it's not opinions that supply and inventory levels.
In terms of inventory to sales ratios are 10 points below what they were prior to the pandemic and the reason for that is that people are sitting at home in the goods economy has been on fire and people are buying a lot of stuff and not spending as much money unexperienced et cetera.
So that dynamic will change, but regardless that 10% will have to snap back to a normal level and thats a source for demand. In addition to that as we outlined in the paper that we put out almost a year and a half ago. Now. We believe there is at that time, we said, 5% to 10% today.
We would say 10% to 15%.
More demand in other words higher inventory to sales ratio.
<unk> than normal or pre pandemic.
Because of the need for resilience and where does that number come from it comes from all the customers that we talk to every day. So between where we are now and where we think we're going to end up being there is a 20% to 25% swing in inventories.
That is huge and it is not driven by the fact that there is a bunch of inventory sitting around.
Certainly not in the U S and may be sitting around and some plant somewhere but in the U S.
There is no inventory around for it to go away, that's the problem and that's what's creating the supply chain gravel.
Now there were a lot of people smarter than me, who predicted that the supply chain problems will be open would've been over by by Christmas.
Or after a <unk> that is not the case all they're doing is they're parking the ships.
Further into the Pacific So that the visual is not as as concerning if you will as a as it would have been too many 60 minutes stories on that.
Concerning the politicians, but that's not the only indication of a supply chain problem. I mean, you could have a product that has 50 different parts going into it and until the last part gets there you can ship that product so thats a supply chain problem.
That you can get trackers to pick up the goods from ports or transport him from eight to point B. That's the supply chain problems I think all of those things are going to take multiple years to result themselves. So I think we're going to be in this mode for a while.
Yes.
Your next question comes from Craig Mailman with Keybanc capital markets. Your line is open.
Hey, everyone.
I don't want to go back to your commentary I know you guys. Traditionally it said, 8% to 9% <unk> growth ex promotes the CAGR since the investor days were 13%.
I believe you guys are already kind of at 10% with initial guidance here I mean in this part of the cycle where.
Market rents grow continues to be underestimated your mark to market grows you're unleashing a little bit of a balance sheet with higher leverage here in that $2.5 million of uses here.
How should we think about.
Maybe this point in the cycle trend until we get the inflection and how long could that last.
Hey, Craig So I think you're asking what's the 8%, 9% if it was 8% to 9% back in 19 has that changed today and yes. It's changed I think for several reasons and it gets back to the Differentiators I talked about in my script, but I'll start with.
Same store my memory is that the same store embedded in that Investor day was three five to four 5% and that had actually it was actually 3% growth on top up 3% growth in market rents, but the mark to market that exist today and I don't remember what that was it was in the teens circle, yes under our new methodology.
Gee I think that that we were about 18% give or take today. We're at 36%. So almost double right. So you can think about that ratched that in place to market alone.
Is going to ratchet up our same store growth by more than 100 basis points.
To 150 basis points. So you can think about that level of same store for several years because that 36% in place to market growth is an average so think about what it's going to be over the next year or two it should be higher right, because youre going to be rolling leases higher and that and that 36% is not <unk>.
<unk>, if you look at our guidance rate for rent growth for the year and rent change I would expect to see that in place to market billed by the time, we get to 2022 and 2022, it's kind of it's going to I think it is going to cross the 40%.
<unk>.
Mark.
That same store is going to continue to grow and it's going to it's not a one or two year story, it's 2345 year story and again, that's with market rents.
Not growing 36%. So that's number one second would be think about our strategic capital business. How we are scaling in that business. How our fees are growing without promotes right. We saw asset values increase.
39% overall for the year walk us why if that increases asset values in our funds and our asset management fees increase as well so that that business is continuing to scale and contribute and then when you look at our essentials business.
We expect we talked at Investor day about that business, adding.
50 basis points of growth kind of <unk> I think we're going to be well ahead of that so I could go on with Differentiators, but.
That 8% to 9% the new normal.
Is I think what youre staring down with our core results this year.
Craig Let me add two things to what Tom said, all of which I agree with number one you actually got our same store right better than most people, including us so congratulations on that.
On that for the past, but going forward.
The market is really good and all kinds of different portfolios, regardless of their strategies will do well in an environment, where rents are going up and cap rates are compressing, but we are thinking way beyond that I mean.
Tom mentioned essentials, we have significant expectations for that business looking at our labor <unk> business that is becoming we did it as a service to customers, but it's.
Quickly turning into a potential profit center.
We have now.
Put together a group to invest in the EV charging and we have actually committed to our first project in southern California.
For EV charging on trucks, the rois on that business are off the charts.
We're not and by the way I could go on for another 20 minutes talking about the stuff. That's in the pipeline. So so we're not sitting and just praying for the real estate aspects of our business. The most valuable aspect of our business is the 1 billion square feet of customers that we serve that are in need of lots of other things. So we're really excited about the <unk>.
Long term prospects, we didn't have that in 2019, those things where a glimmer in IRI now there are real businesses producing real bottom line. So so.
So thats why im pretty optimistic about the future going forward and remember all of that is being done with sub 20% leverage.
And and external growth, yes, we have more external growth on anybody, but but in relation to the size of our portfolio of external growth is almost an afterthought, we don't need to depend on that.
In my opinion, the lower quality source of source of growth because you're just arbitraging.
External capital to the internal cost capital ours is organic so.
Really really not only feel good about the level of growth going forward, but also the quality of that growth.
Your next question comes from the line of Ryan <unk> with Morgan Stanley . Your line is open.
Ron Camden Your line is open.
Thanks, so much for the time.
<unk> on the quarter, just thinking about the same store NOI guidance for 'twenty two any more color on maybe the U S versus Europe , and maybe can you compare and contrast, how you expect sort of growth for next year.
In the two regions. Thanks.
Yes, I'll throw in some thoughts on rent growth rent growth in Europe is catching up to them to the U S and we've seen this play out in the past and frankly, it's catching up slower than we expected because vacancy rates across Europe have been lower than the U S. But.
Taking place now.
And Chris you ought to pile in here.
This year, we will see European rent growth and I think we will.
Exceed that in the U S.
Indeed, the vacancy rates are lower and the rent growth is accelerating.
Interesting point in time in the European markets.
Yes.
Your next question is from Jon Petersen with Jefferies. Your line is open.
Thank you.
Just wanted to ask an accounting question on the promote income is that considered re income or is that in the taxable REIT subsidiary and if it is really income is that going to necessitate a large for potentially a special dividend. This year, just given the size of the promotes.
The vast majority of it does come into the REIT itself versus the taxable REIT subsidiary when do you think just about dividends as we've talked about in the past.
We are we have extremely low payout ratio, 60% ish is what we've been averaging in similar to what I would expect for 2022.
And we're paying out the minimum required. So you should think about our dividend having to grow in line with our underlying earnings. So when you see earnings growing at 22%.
Those promotes are landing.
Landing in the O P and our REIT and.
It needs to be reflected in our dividend accordingly.
Your next question is from Nick <unk> with Scotiabank. Your line is open.
Thanks.
In terms of the guidance for this year on strategic capital and the promotes Tom can you just give us a feel for what level of asset value appreciation is assumed for the funds this year.
<unk>.
Sure Nick so well.
Ill preface it by you know there are several factors that go into the promote.
Not just the real estate valuation, there's FX considerations, because it's a euro denominated funds, but that fund also has.
Functional currencies not in Euro British pound for example, right. So there's FX activity going on functional and transactional transitional.
Second would be there's debt mark to market and Theyre. So long winded way of saying that there are a lot of factors that that impacted from a evaluation standpoint, we think there's some modest.
Mid single digit.
Valuation increase embedded in there we're taking our best shot at where it's going to land a lot of variables can impact it and we're going to update you accordingly, as those move around particularly given how the site.
How once you once the promote exceeds that top hurdle.
You can have a lot of variability in either direction, just depending on how things go. So the funds based on third party appraisals, they're going to be what they're going to be interest rates are going to be what they're going to be FX rates are going to be what they're going to be we've taken our best shot.
At.
Estimating those impacts and we will keep you posted.
Yes, the other thing I would add to that is that we're not assuming cap rate compression and based on today's values I would say there is a appraisal lag built into some of these valuations because it.
The appraisers have that have a hard time, keeping up with comps even today. The market has been so fast moving so I think there are a couple of layers of protection built in that and obviously as Tom explained once you pass the waterfall.
All of the additional values promoted bowls, so theres a lot of leverage on the upside and also on the downside.
But if I were a betting person I would take the upside on that not not to dance.
Your next question is from Anthony Powell with Barclays. Your line is open.
Hi, Good morning, I guess, a follow up on the term no question, yes. Thanks for the color on 2020, we promote how should we look at this stream of income over the next few years and should we valuing promote at a higher multiple historical given kind of a recurring increasingly increasing recurring nature and the growth of the valuation of the portfolio.
Let me take a stab at this the issue with our promotes is this we have two huge open ended funds that are promoter ball and those are on three years promote cycles, So 22 and 'twenty three.
Big promote here, it's just like 'twenty, and sorry, 19, and 20, where.
Sure.
Except Marshall so the third year, we have some small funds and that the area. This year. For example is that third year, which is relatively thin. We had this past year, we had U K L. L V. In there. So we have some smaller funds and there those funds over time will grow. So this promote texture will come more.
But we've also gone through a modernization of our funds terms and and given the investors.
The option of basically extending their promoter both periods to that to the lean years and also new capital coming in is going to have its promote tie to the year that the capital came in as opposed to a set year. So over time, you're going to see these promote smoothed out.
It will take some years for them to be perfectly smooth. So the way I would think about it is look at the promotes over a three year cycle and average them and I think the guidance that Tom talked about for this year 2022 is actually not a bad number as sort of thinking Nevada roughly.
That average.
Over a three year periods and as to the valuation of that look to you guys or you guys can do that better than us, but we're not getting anything for that and we should get some things. So because the industry is there you can go back and look at it.
Or 10 years under that new Prologis 11 years.
And assume something as a percentage of AUM historically I've always used.
25 basis points kind of in my head.
Notable.
AUM with 60% of that is going to the bottom line because of our.
Participation programs. So that's the way I think about it in a normalized year, but I think it's going to be much higher than that.
In this cycle.
<unk> certainly seen seen our AUM grow and continue to grow so the underlying base. It's pointless is growing rapidly as well.
Your next question is from the line of Blaine Heck with Wells Fargo. Your line is open.
Great. Thanks.
To touch on the acquisitions quickly it looks like you guys came in light this quarter relative to guidance and I know acquisitions are certainly tougher to forecast.
And then what youre going to be able to do on the development side or even on the disposition side, but wanted to get your thoughts on the acquisition market in general.
Whether the shortfall this quarter was driven by pricing or anything else, specifically and then any broader commentary regarding your level of interest, especially in large acquisitions in 2022 would be very helpful. Thanks.
Yes, there was nothing in the quarterly results as indicate indicative of more or less interest.
And as you see quarter to quarter these numbers move around quite a bit.
We are always in the market, we look at all the deals big small portfolios et cetera.
And.
Prices have been moving up obviously there are competitive situations.
But I think we're we're disciplined like we always have been.
With acquisitions, but we.
We got great teams and we are on every deal.
Your next question is from Michael Carroll with RBC capital markets. Your line is open.
Yes. Thanks can you provide some color on your underwritten development margins it looks like the margins in the <unk> 21 in 2021 starts is below the in place pipeline and the recently stabilized assets is there something there that's driving those lower or is it just conservative estimates.
Well our margins on starts have historically always been projected to be lower than our actual margins at completion.
Because we don't count on things like Super rent growth and as we talked about earlier or cap rate compression or all those other things that have happened and obviously over time, we are using up the cheapest land and buying more and more of our land of margin. So.
And the kind of margins we've had.
In the last couple of years have been.
And the unprecedented so over time, you should expect those kinds of margins to glide.
To a more normalized level as the cap rate compression slows down and rental growth eventually will slow down you can't keep growing it.
90% a year.
So that is not at all unusual theres nothing specific going on that are there.
That mix, where in some years as you know with <unk>.
<unk> more here and there and there are different and our land bank has different ages in different jurisdiction. So.
<unk> has a lot.
Little bit to do with it but the general trend has been.
Much higher than across cycle kind of margins that we would expect to.
<unk>.
Okay.
Your next.
<unk> is from Dave Rodgers with Baird. Your line is open.
Yeah, Hi, everyone wanted to ask about just kind of labor in general obviously from a broader economic standpoint, a big issue for everyone. What are you hearing from your customers in terms of the rebuild of inventory maybe related to labor, how long that might take and whether labor is getting better and worse for them and how that might be impacting any real estate decisions if at all.
Labor is getting worse labor has been getting worse actually afford 10 years.
And the pandemic only just made it <unk> faster.
I think that is forcing our customers into <unk>.
Deploying more automation.
Because they have to get their work done that requires a lot of capital that many of our customers don't have.
So that's a business opportunity for <unk> is to invest in innovation and robotics and all kinds of other automation.
Issues that that help with the labor.
<unk> also seen there'll be why is it is a major step that we've taken in that regard.
But I will tell you. This there more of that technology is deployed in our buildings the stickier tenants become and probably they determined the lease will increase and turnover costs will go down so.
So I think it's good for us long term, but I don't think this labor problem is going to get solved.
And it's particularly acute in the U S. It exists in other parts of the world, but it's particularly acute in the U S and the law.
Theories as to the reasons for it but I'm not smart enough to know, which ones makes sense of which ones don't.
Your next question is from Tom Catherwood with <unk>. Your line is open.
Thank you and good morning, everybody.
Tom going back to something you mentioned your opening remarks, you were talking about the $26 billion build out potential in your land Bank and you mentioned that it's underpinned by an international opportunity set.
Developments, obviously jumped in 2021, but they seem to be weighted more towards the U S than they were in 2019 in 2020.
Is the expectation that Europe could account for a larger percent of the 2022 starts or is the opportunity set you were talking about kind of in other geographies.
Yes. So if you look at the composition of the land bank, our option land and covered land place. So this is almost 200 million square feet of build that opportunity. It's about two thirds in the Americas and a third outside of the Americas. So that's the that's.
The balance and the pace at which the cadence at which we.
We take it down it will be opportunity driven.
The other thing I would say is that if you look at our 20 year track record of development profits actually two thirds have come from overseas and a third from the U S and again, that's a differentiator for Prologis, where where we we just have a bigger playing field.
Two.
To make money on.
Okay.
Your next question comes from the line of Vince <unk> with Green Street. Your line is open.
Hi, Good morning, I wanted to follow up on the lease Mark to market could you share of the estimated mark to market on a cash basis and also share. The typical annual escalators you are getting on leases today.
Yes.
The cash in place to market today is right around 30%.
And from an escalator standpoint, I think what we're seeing today with escalators would clearly be in the threes.
And in certain markets, it's in the fours and potentially even higher so I would tell you there when we think about all this escalators are certainly important but at the end of the day. Our teams are trying to drive the highest.
Cash flows with Canada at least bumps are part of that starting rents are part of that <unk> are a part of that right. It all goes into the mix and so while it's important to look at bumps, it's not necessarily the sole determinant of the economics.
Driving out of leases.
We are NPV investors on leasing.
And and the profile of it is usually our flexibility to deal with the tenants preferences actually allows us to extract a higher NPV.
Your next question comes from the line of Mike Mueller with Jpmorgan. Your line is open.
Yes, Hi, I'm wondering is there a big difference today in terms of the margins youre expecting on build to suit versus spec developments.
Mike I would say there is no no greater difference and there always have been.
We underwrite these.
15 to 20 on on spec in.
Roughly 10% on build to suit and those numbers will move around a little bit based on risk, but if youre asking about the differentiation between the two.
Things really haven't haven't changed.
Obviously, the outcomes of change because the margins are much much much much higher.
Okay.
Your next question is from Steve <unk> with Evercore ISI. Your line is open yes.
Yes. Thanks had a just a question on development costs, you know what sort of inflation trends are you seeing kind of starting this year, how did that compare to.
'twenty, one and what sort of bottlenecks or issues are you seeing kind of in your own supply chain.
All the stuff you need to kind of build everything you want to build this year.
Yes, Steve so in the U S in 2021.
Total shell construction cost increases of about 31% and that's on a market wide basis.
We were able to mitigate about 7%.
Of that increase or seven percentage points of the increase so our net increase that we absorbed last year.
It was 24%.
So we feel like most of that is a competitive advantage against our.
Our competitors.
<unk>.
There.
A lot behind this in terms of what do we see for this year tough to say how that.
Plays out, but our teams are.
Considering a 10% to 12%.
Additional shell construction increase through 'twenty two.
By the way then let me tie that to some of the earlier questions. When you're getting this kind of escalation on replacement cost and by the way I would say land land prices have gone up even at a higher rate than that it's nice to own already 1 billion square feet of this kind of real estate. So.
Particularly at all.
The other people trying to get into the same business driving down cap rates at the same time that replacement cost rents are going up is a nice place to be that is not brilliant thats just dumb luck.
Your next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, there I guess, just considering your expectations for 'twenty, two and the guidance you've laid out can you give any details on what portion is already known like for example leases signed in 'twenty. One that will commence in 2002, you already know that timing and rate, but for the parts that you don't already know like lease commitment.
Half of our peso development stabilization, what sort of assumptions are you making.
Strength of 'twenty, one stays the same improved further slows and kind of what's driving that.
I would say Caitlin.
There are very few things that haven't happened already in and that will affect 2022, one way or another because even if we get it wrong on rental change on one side of it together, we put away. So many of our rollovers already in for 2022.
There isn't that much opportunity on the margin to sort of affect that.
And a big Big way, so the 6% leasing.
Basically remaining to be done and.
That's going to happen on average in the middle of the year. So that's really 3% of our 97%. It's just not going to move the numbers around that much and obviously development stabilization and all of that are more of a.
Future year type of thing again, they occur during the year, So I would say our.
Volatility in the short term, meaning this year is going to be relatively modest and you can take that answer it to the bank pretty much any year at this time.
And then I go back just to the in place to market that $1 $2 billion of NOI. That's we will capture with no market rent growth that gives you a high level of.
Certainty regarding the same store growth going forward. So the things you need to think about us.
Rent growth outperforms in 2022, that's going to take that $1 $2 billion up I mentioned, I think that 36% in place to market today is going to cross 40% by the time, we get to the end of the year, it's that sort of predictability I believe that underpins our.
Our confidence why our growth will be.
<unk> continued to be sector, leading for many years to come.
Your next question is from Gerrick Johnson with Deutsche Bank. Your line is open.
Hi, everyone. Thank you are rising Brian revenue growth still handily outpacing the supply chain inefficiencies.
Inflation and really overall expense growth.
How do you view rents versus expenses.
Linked expenses playing out in 2022.
I'm not sure I understand the question completely expenses, obviously going up.
As well, but theyre going up more sort of in line with general inflation and real estate rent inflation.
In logistics has been certainly higher than that if you want to describe it as inflation. The other thing is that in terms of overall logistic costs rents even with their recent escalation or three 4% of the total picture. So.
Cost of drivers costs that fuel cost of transportation all of those things are much bigger factors in terms of our customers' cost structure. So.
There is not as much sensitive sensitivity.
The real estate costs. If there is a commensurate increase in productivity productivity that comes along with them I think that's what you asked but.
We will give you will give you an opportunity to clarify here.
Not what you asked.
Okay.
Thank you Okay alright. Thanks.
Okay.
Your next question comes from the line.
<unk> Korchman with Citi. Your line is open.
Hey, good morning out there, it's Michael Bilerman.
I wanted to come back to you gave an answer where you said.
Youre not going to predict cap rate trends, because you've been consistently wrong last five years.
And I wanted to sort of dive into sort of the components.
That made you wrong over the last five years I get rents have moved up dramatically NOI is so important is the numerator.
Denominator of the cap rate.
Does it impact your capital allocation decisions with the buy sell to develop how you raise capital on the balance sheet and all of those sort of inputs.
I guess, how are you thinking about it going forward you must have a view.
And so I'm just trying to understand maybe some of the components that may do wrong over the last five years and how that informs your decision going forward.
Look we've taken our best shot and we do have a view on these things after all we give you guidance in.
And we've done that for 25 years. So we do have a view.
And our view is always been not always but in the last 10 years as far as I remember.
Is that.
Most of US in this room sort of grew up in the eighties nineties and cap rates were 9% and 10% for.
For logistics in those days, so as the cap rates of March down in the last 20 years to where they are today I don't know three years to 4%. We are anchored in the past so it always feels like it's.
A little expensive and all of that but.
There are a couple of things that have changed logistics has first of all a general interest rates and all that have driven capital market returns down for everything stocks bonds, everything, including real estate, but I think there is been a better appreciation of the logistics real estate as an asset class that has caused logistic cap rates.
To compress further than maybe some other property types that have compressed less or in more recent years gone. The other way I don't see anything stopping that part of it. So youre guess is as good as mine and with respect to long term interest rates and their direction, but I can tell you.
The weight of the money is accelerating it's not it's not slowing down the <unk>.
Other thing is that I think if you if you're uncertain about the inflation outlook, which is what a lot of the discussion is is if inflation is the supply chain as a short term and long term not a bad thing to own modestly leveraged real estate in an asset class, that's an equilibrium actually better than equilibrium couple of hundred basis.
Since tighter than equilibrium.
When you have replacement costs that give you that buffer. So so we have the buffer of the mark to market in the 30% range that Tom talked about but we also have the buffer of replacement costs going up which Jean talked about that as just the future buffer that we havent started talking about yet so.
I think rental rentals.
I have been consistently in our company.
Low on rental projections, but higher than all my colleagues.
Low compared to what actually happened, but higher than all of my colleagues and I expect that to continue for some time, but I think it's imprudent in a year, where you have had this kind of spectacular rental growth to go out there and project and more years of that I mean.
So we run our business assuming more modest.
Sort of more closer to trend line type of dynamics and if it works out better than that.
We reported to you every quarter. So we tried to get it as close to the pin and as the pin moves will move.
So I don't know if that's an answer to your question or not one other thing I would tell you and I think you were the is this the last question, yes, you're the last question. So maybe this is a wrap up.
As you as you think about our company, it's really important to get cap rates right really important at least in the long term to get rental growth in all of those things right and we will outcome Pete on dose basis, all day long.
But this company has increasingly become becoming a multiple product line cash flow generating type of business Tom.
Tom mentioned $1 billion coming out of our private capital franchise.
Essentially no capital because our capital is our core investment which is in the rent business.
The essentials business, we sort of gloss over it but its a 75 million.
$1 million a year business now it can be a $1 billion business. The <unk> business can be a $1 billion business.
Not saying that it is or whether it's going to happen two years, but increasingly we're building. These cash flows on top of the base real estate business, because eventually the real estate business will slow down but the ability.
To do business with those customers that do use our real estate.
<unk> is a runway for us for multiple decades. So so that's what's really exciting about where we are today.
Thank you for your interest in our company and we look forward to talking to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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