Prologis Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 14, 2021

There are 4 speakers on the call.

Operator

Thank you for standing by. Welcome to the Telogis Quarter 3 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

Traci Ward, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Sarah, and good morning, everyone. Welcome to our Q3 2021 Earnings Conference Call. A supplemental document is available on our website at echologis.comunderinvestorrelations. I'd like to state that this conference call will contain forward looking statements under federal securities laws.

Operator

These statements are based on current expectations, estimates, projections of

Speaker 1

the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. Are listed as factors, please refer to the forward looking statement notice in our 10 ks or SEC filings. Additionally, our 3rd Quarter Results, Press Release and

Operator

Supplemental do contain financial

Speaker 1

measures such as FFO and EBITDA that are non GAAP measures. And in accordance with Reg G, we have provided a reconciliation to these measures. This morning, we'll hear from Tom Mollner, our CFO, who will to cover our results, real time market conditions and guidance. And also here with me today are Hamid Moghadam, Gary Anderson, Kripp Kaden, Jim Ard, Mike Kerwin, Sam Ledter, Ed Netter, Gene Riley and Karsten Helbig. With that, I will turn the call over to Tom.

Speaker 1

And Tom, will you please begin?

Speaker 2

Thanks, Tracy. Good morning, everyone, and thanks for joining our call today. 3rd quarter results exceeded expectations and were underpinned by record increases in market rents and valuations. Operating conditions are being shaped by 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. As demand surges, having the right logistics real estate in the right locations has never been more mission critical to our customers.

Speaker 2

During the Q3, we signed 56,000,000 square feet of leases and issued proposals on 84,000,000 square feet. Spaces above 100,000 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 1 quarter of new lease signings. The activity was down sequentially as anticipated although remains above trend. Given the sharp ramp up in demand, we are raising our 21 U.

Speaker 2

S. Forecast for net absorption of 14% to a record 375,000,000 square feet Against deliveries of 285,000,000 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 in this quarter to reflect only for largest markets. As strong demand is being met with historic low vacancy, pre leasing in the U. S.

Speaker 2

Delivering 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 Q3 alone, rents produced 7.1% in our U. S. Markets far exceeding our expectations.

Speaker 2

We are increasing our 2021 market rent forecast significantly to an all time high of 19% in 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 It is now approximately 22% with an upward bias. This current rent spread represents embedded organic NOI Growth of more than $925,000,000 or $1.25 per share.

Speaker 2

Record rent growth is translating to record valuation Our logistics portfolio posted the largest quarterly increase in our history, rising 9.5% globally, Bringing the year to date increase to 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 tailwinds over the next decade. Switching gears to results for the quarter. Core FFO was $1.04 per share With net promote earnings of $0.01 The change on rollover was strong at 27.9%, slightly lower sequentially due to mix. Average occupancy was 96.6 percent, up 60 basis points sequentially and we reached 98% leased at quarter end.

Speaker 2

Cash seems to ROI growth accelerated to 6.7%, up 90 basis points sequentially. We had a very productive quarter on the deployment front. Margins on development table locations remain elevated coming in at 47%. Our development starts were $1,400,000,000 Consisting of 31 projects across 21 markets with estimated value creation of more than $520,000,000 Turning to Strategic Capital, our team raised almost $500,000,000 in the 3rd quarter and $2,500,000,000 year to date. Equity queues for our open ended vehicles were $3,400,000,000 at quarter end, another all time high.

Speaker 2

Moving to guidance for 2021, our outlook has further improved and here are the key updates on our share basis. We're tightening and increasing our cash Same store NOI growth to now range between 5.75% 6%. We're increasing the midpoint for strategic capital revenue excluding promotion by $12,500,000 and now range between $480,000,000 $485,000,000 We expect net promote income of $0.05 Increasing development starts by $450,000,000 to a new midpoint of $3,700,000,000 Our owned and managed land portfolio now supports 180,000,000 square feet and more than $21,000,000,000 of future build out potential, providing a clear runway for significant value creation over the next We're also increasing the midpoint for acquisitions by $500,000,000 The increased pace of acquisitions relates to our focus on covered land players And turbine last touch opportunities. We're now expecting net deployment uses of $650,000,000 at the midpoint. Taking these assumptions into account, we are increasing our core FFO midpoint by $0.03 and narrowing the range to $4.11 to $4.13 per share.

Speaker 2

Core FFO excluding from us will range between $4.06 $4.08 per share, representing year over year growth at the midpoint of almost 14%, I'll be leveraging by more than 300 basis points. We expect to generate $1,200,000,000 in free cash flow after dividends, Most of the benefits from the current environment will accrue to the future. Our 22% in place to market rent spread, Evaluation impact on promotes, our leverage capacity, the $21,000,000,000 of development build out and most importantly the vast The opportunity set that our global footprint provides all pave 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. Prologis plays a unique role in the industry and we're committed to helping find long term solutions.

Speaker 2

That's why we're working closely with our customers, healthy makers and community partners to help address the problems, which range from warehouse space to transport infrastructure In closing, I want to highlight 2 important upcoming projects events. First, this Monday, we'll be hosting a webinar that will dive into our Development and Strategic Capital businesses. In 2nd, on October 27th, we're bringing together supply chain and community thought leaders to focus on some of the most pressing issues in logistics today, including workforce, energy and transportation. Please visit our website for more information and the registration links for both events. And with that, I'll turn it back to Sarah for your questions.

Operator

Your first question comes from the line of Caitlin Burrow from Goldman Sachs. Your line is open.

Speaker 1

Hi, everyone. Good morning. Maybe just the earnings release mentioned that your I think the largest will actually be able to deploy capital and use that opportunity? And if so, how? Or do you think that's right

Speaker 2

As you know, we Really never provide guidance at least voluntarily on deployment because as I said many times, it can range between 0 and a lot. Last year it was $21,000,000,000 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 had a feel for what we can do, if the right opportunities came about. But There's no urgency around investing in a particular timeframe.

Operator

Your next question comes from the line of Emmanuel Korchman from Citi. Your line is open.

Speaker 2

Hey, everyone. Good morning. Tom, I kind of wanted to reconcile a point you made earlier in your script, which was that customers are I'm keenly focusing on being more space and we're reading a lot of headlines on shortages of inventory, of labor, I guess, help me reconcile the two points where customers looking for space that maybe they can't sell right away or they just I think the supply pipeline to rebound quickly or moving stuff from other warehouse or I think it's a little bit counterintuitive for somebody to be taking more space when product is sort of an issue like that. Sorry for the long question. Thank you.

Speaker 2

Jessica. Yes. Jenny, let me try to answer that question. The supply chain is very long and it's gotten longer in the last 10 years. So basically what happened is took a bit of a big, long hose and somebody burned off the water and the hose And as economies came back, the chemicals got opened and production started and it's now flowing through the supply chain.

Speaker 2

So, it is not going smoothly and the old models for predicting demand and carrying inventory are basically thrown out the window. So inventory, particularly mid product inventory, not finished price, 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 store somewhere. So, it's creating pretty significant extra demand just to balance out the So the natural follow-up question from that I would guess would be, Well, you guys think about this being a one time event or a sustainable event. And I would say this particular Right behind that are the 2 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.

Speaker 2

And those two things, People aren't even thinking about right now because they're struggling to keep their heads above water. So I think the Long term thing is really interesting. It's great for headlines and all that, but I think the much more interesting factor in terms of the factoring, the

Operator

Your next question comes from the line of Tom Catherwood from BTIG. Your line is open.

Speaker 2

Excellent. Thank you so much, guys. Good customer cap rates. We've seen incredible compression this year. And unlike prior years, it's really seemed to be across the board.

Speaker 2

Does that create any risk in certain markets or regions participant. That's a tough question to answer. I'll give you mine and Jean, I'm sure, will have ideas about this. First of all, we're in our first lead path and predict the cap rates. We've been saying for about 5 years that they're too low only to watch them going forward.

Speaker 2

Remember, cap rates are a function of 2 things. 1 is general returns available in other capital markets Annual interest rates, our risk free rates and more recently this rent growth and the Growth, growing power of that initial yield is orders of magnitude higher than it's ever been. So, I'm not smart enough to parse Why cap rates are congesting? I suspect it has more to do with the competitive growth rate in the last 6 months And it does with interest rate picture. In fact, the interest rate picture, if anything, has increased.

Speaker 2

But the tremendous growth in France, I I think has way to see the drag from taking higher interest rates. Gene, please. Yes, I think you may be getting to the spread between primary and secondary markets. And that So, I think there's always a risk as cap rates in secondary or even tertiary markets are dragged down By the overall strength of the market, because you're going to see more supply in those markets going forward against Probably less demand. So we'll see how it plays out.

Speaker 2

But I don't really think appreciated from point of view Those spreads have actually tightened down much further.

Operator

Your next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.

Speaker 2

Thank you. We get asked a lot about Just the potential supply coming online with so much capital going into this sector. Can you talk a little bit about whether it's a competitive mode or just kind of how Solargis will be able to kind of protect itself and supply growth or maybe that's a long way to think about it. Just how should we think about the supply risk overall? I think you should think of supply risk as very market specific.

Speaker 2

And You can have all the desire to bring on supply in LA or over San Francisco or Seattle or even Inland Empire, certainly in London Empire West or New Jersey, take all 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 what we refer to as non constrained in terms of land, Believe it or not, are getting more constrained, actually in town constrained, but they're more constrained, certainly in the good location. So, I think The big driver is that it's just hard to come up with a land to build buildings on.

Speaker 2

I mean, supply is responding to demand. But I will my gut feel, and of course you can't prove this one way or another, is that demand would be higher if supply were higher. I think people are just just based on the number of people competing for the same group spaces and all the in Calls we get from all of our good customers trying to gain an advantage over another good customer. It is people are Kind of in a panic almost when it comes to buying or committing to real estate. Demand is just crazy.

Speaker 2

So Jamie, I'd also add that it's It's actually submarket specific. And in terms of how do we protect ourselves, we do this All the time, whether it's a strong market or weak market, we're always monitoring where that supply come from. So, I don't think we really change our

Operator

Your next question comes from the line of Derek Johnston from Deutsche Bank. Your line is open.

Speaker 3

Thank you. Hi, everyone. In January, on 4Q 20 Your in place to market rents for adjusted 12.8%. And with that in place to market now at 22%, just 9, 10 months later, what are the key drivers to this change? And really how sustainable is this mark to market across the

Speaker 2

Yes, I'll take that. So I'll anchor you back. First of all, the increase is all driven to High market rent growth. And I think as I mentioned in my remarks, we're almost 22% today and there is an arrow up Just given very minimal role in the Q4 and given our market rent growth expectations, so I would expect 22% and So higher when we're on this call in January. One thing I would anchor you back to is at our Investor Day back In November of 2019, that in place to market was 15.5% and that was Underpinning what we said our GAAP same store growth at that time was at 3.5% to 4.5%.

Speaker 2

Now here we are today at 22%. And when you think about that increase that really takes the 3.5% to 4.5% to almost 4.5% to 5.5%. So that's the impact. We've really extended Here we are almost 2 years later and it's up dramatically and our runway It's arguably gotten even longer. So the underpinning of the organic growth potential that we have is sitting right there The only thing I would ask Tom Salmon is actually land prices in most markets are going up faster than rents And construction costs are going up faster than rents.

Speaker 2

So, actually the rents required for that Marginal square foot of supply is ahead of that 22%. So that's why the arrow is up. It's just we're running but

Operator

Your next question comes from the line of Kevin Kim from Tuohyun. Your line is open.

Speaker 2

So I wanted to talk about your development pipeline. It's obviously growing very nicely to $5,000,000,000 Can you remind us The hard cost, how much of the cost are hedged or at least material And as those expire, the favorable benefit of those hedges expire, what kind of impact can you add to your Future development in terms of margins and yields. So, Ketan, we think we've contained About 25% of the cost increases we've seen to date. So in our pipeline In terms of the starts going forward, 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, You don't really see risk.

Speaker 2

I'm not going to get into the details of what we've done with pre buying steel and other components on these projects. But I think we've 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. The other thing that we've done which is really critical is we've maintained our schedules.

Speaker 2

And I think today, I think we've picked up 30 days of schedule versus the market. In fact, we build these billing factors in the market anyway, but that's an incremental 30 days. The supply chain disruptions might just cost their schedule. So I think you're I mean ultimately you're getting to how much have we sort of I told you what we've done so far. We're probably out probably 6 months ahead of You can't really get much further than that.

Speaker 2

So, I feel really good about what we've done this year and I feel like we've prepared really well going So, we feel good about the outlook and obviously we're raising guidance in our volumes. Yes. I think more importantly than hedging construction costs is the fact that rents are going up faster than some of these cuts If you take an overall average and certainly in the best markets. So that's why margins are expanding, average being Also, compression. So far so good.

Speaker 2

Will it continue forever? Probably not.

Operator

Your next question comes from the line of Ronald Tom Dem from Morgan Stanley. Your line is open.

Speaker 2

Just a quick one on just for Jim's shooting up up 50 days Nothing unusual about mix or geography, but as we said, customers don't have options. There's really a lot of Places to go and I think there's a race to secure really good well-to-do real estate and that's what we're that's what we're seeing. That number can be very volatile quarter to quarter. Honestly, I wouldn't pay too much attention to it over a quarter.

Operator

Your next question comes from the line of John Kim from BMO Capital Markets. Your line is open.

Speaker 2

Good morning. I was wondering if you can comment on how you see occupancy trending with your lease rate now at 98%, you're also pushing rents And also if you can comment on the big sequential increase in occupancy in Asia during the quarter? Participants have to go higher. I mean, if your demand is 3, whatever, 85 and supply is 295, There's 100,000,000 feedbacks going to come out of somewhere and after that the obsolescence that's significant in our product that's Taken out of circulation because people build something else on it like apartments. I think for sure vacancy rates at least in the markets we care about Are going to be going down in the foreseeable future.

Speaker 2

In the long term, We need to see. I don't expect $385,000,000 for the demand being the new norm forever Because some of it is just people being desperate for putting their stuff somewhere. But I think it will John, your question on Asia, that's being driven by China. We've seen some good very good rates of activity in China Japan. The new team in China has done a really great job moving to space.

Operator

Your next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is open.

Speaker 2

Hey, guys. Just curious on the rent growth piece of things you guys talked a lot about today. But is there Hey, Chantere negotiations. Are you guys trying to push escalators higher as a way to combat potential inflation here in the near term or just Maybe smooth out some of the rent increases, some of the trends we have to build up, the big store shop at the end of the lease. Well, there's a variety of rationale for that.

Speaker 2

But escalators are Moving up, we're pushing them everywhere as you can imagine. But as importantly, the markets Are accepting this and 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 are in straight line anyway. But I think it's just it's

Operator

Your next question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.

Speaker 2

Yes. Thanks. Most of my questions have been asked. 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 that versus build to suits. I mean given your commentary about customers, How do you sort of see that trending moving forward?

Speaker 2

Yes. So, Steve, I'll take the first part of it. So, we've got about 100 projects we're So, it's really broad based. And I wouldn't say that the increases are targeted to certain areas because frankly there's so much demand Mark, we're pulling forward projects that we can, number 1. And number 2, A lot of this increase is build to suit activity and maybe Mike can comment on that.

Speaker 2

Yes, Steve, Yes, up 60% of our activity was build to suit, still normalized end of the year in the mid-40s, but I remind you that's going to be at a much harder base, which is representative Two great things. There's fewer tech opportunities for people to move into and that's paired up with major structural rollouts that are well underway with Whole lot of companies over and above Amazon. So we see a bunch of diverse activity there and no surprise margins are

Operator

Your next question comes from the line of Brent Thill from UBS. Your line is open.

Speaker 2

Hey, guys. So with the shortages of certain items in the supply chain, how is that impacting the procurement programs for tenants, things like the push, lightings, rack, Etcetera. Also, how are you kind of managing labor challenges against the backdrop for record demand? Yes. Certainly, there's delays in some of our essential projects as well, or could this racking those sorts of things.

Speaker 2

So OEM manufacturers in those business are also struggling. So lead times are longer. While we're using, again, our leverage and our scale, just as we do on the construction side of the business to Clearly, labor is on the minds of a lot of our customers and we're seeing them getting creative on how they're attracting labor and you see the commercials for a lot Lots of companies on TV, what they've been in there. It's also having a focus on automation. And we're discussions about automation and automation these days is not the old version of it where it's finished bespoke.

Speaker 2

We're seeing lots of flexibility out there in terms of Robotic forklift and autonomous forklift and those types of things, which we think our buildings are very well suited to the primary criteria for that is a good We spent over 30 years making sure our floors are in really good shape. So we think we're in really good shape to address Automation, which I think will be a function of this labor issue going forward.

Operator

Your next question comes from the line of Mike Mueller from JPMorgan. Your line is open.

Speaker 2

Yes. Hi. Tom, you previously talked about base case annual promo levels. How does that change Yes. As a reminder, we talk about, call it, dollars 0.07 of annual promotes.

Speaker 2

If you Net promote income, if you go back and you look at our historic performance, clearly given where valuations have gone, I would expect 2022 promotes to be substantially above our earnings program rate. Clearly, we'll talk more about it in January, but directionally, that's what you should expect. Yes. Promotes are pretty levered on the upside because once you pass the direct return, That incremental unit of return produces promote, whereas getting up to your preferred rates, you're not getting any promote. So For sure, it will expand non linearity.

Operator

Your next question comes from the line of Anthony Powell from Barclays. Your line is open.

Speaker 2

Hi, good morning. A question about the building acquisition I understand that you could increase shares, talked about covered land plays and your last touch. What kind of the environment practices there and how are CapEx flowing for those types of deals? It's very competitive for Last Touch. There's no question.

Speaker 2

And CapEx are tough to talk about because you have in place brands, you're capping income that's literally all over the place. So I'm not sure if I can start to talk about the CapEx, but it is competitive. I think we have a strategic advantage in the markets we want Because we've been doing this now for 3 or 4 years. So, I think we have scoped out The sub and sort of micro markets, it is competitive and there is a ton of demand there and That's not going to change. The yields on our covered land place The entire portfolio of our land base, 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.

Speaker 2

And some of it is short And rents have gone up a lot. But 5% is pretty good. You're getting paid to wait. And with the Lake Terry land, I mean the Lake Terry land is covered in place and auctions. And Really, the own land that's just sitting around there, that's the most expensive way of hearing you say.

Speaker 2

So, we've been on to the 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 in the next 12 1 to 4 months is going to be building out on the covered land place. But the good news is we're replenishing that And then some as we chew through it. Yes, just to add on to what Amit said. So we have about 180,000,000 feet flowing to the covered land place.

Speaker 2

We have about a 2% stabilized yield for the entire land bank Including all three components of it. And after you pay taxes, you're still in the plus. So, we're kind of carrying this for free. And frankly, some of those income profiles on the early covered land plays are have a serious outbound to them. So, another way to think about land exposure.

Operator

Your next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is open.

Speaker 2

Thanks. So, people see leasing activity or demand improve as the supply chain disruptions dissipate and inventory levels improve. For our customers, Looking for these problems right now and really trying to help our logistics network that we need over the next 3 to 5 years. I think you're doing both, but I think most people are focused on just doing the Christmas. I mean, literally, You should be not thinking about the long term and people who are, some of the larger, more sophisticated players are and those would be the targets of the world, Home Depots of the world, Like that.

Speaker 2

But there are lots of people just trying to survive the next year or 4 months. So, I think that crazy crunch will diminish over the next 2 to 3 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.

Operator

Your next question comes from the line of Abe Rogers from Baird. Your line is open.

Speaker 2

Yes. Most of my questions have been answered, but I just wanted to just follow-up on the labor point. Obviously, labor a big concern today, 400,000,000 of additional demand kind of in the last 4 quarters alone. Are you seeing customers making different decisions on locations, Campus settings, whatever it might be, related to kind of longer term labor concerns, notwithstanding kind of the technology, are you seeing kind of payment 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.

Speaker 2

And real estate and real estate costs are 2% to 5% of the total cost. And by the way, that number hasn't gone on, Going up because the rent is going up because other components, labor, transportation, energy are also going up. So They're not going to optimize around real estate, Josh. They're going to optimize around where their consumers are and where How long it takes to get them there, what they want and it's most of the time not cost. So they're going to have Operating in the big markets.

Speaker 2

I mean, you're not going to go in the middle of the space in the middle of the country because real estate rents are cheaper to service the desirable markets where a lot of the growth is kind of costly.

Operator

Your next question comes from the line of Nick Yulico from Scotiabank. Your line is open.

Speaker 2

Thanks. I just wanted to follow-up on the leasing market and particularly the 3PL market, which has been incredibly active year to date. Just talk a little bit more about the trends you're seeing there. I imagine we've heard the anchors of like increasing maybe Amazon using that market for the future to get to face on a real time basis. Any perspective would be very helpful, This is Mike.

Speaker 2

And 3 deal activity was up 500 bps last quarter. And we've seen this really play out over the last several years where CPLs might have viewed space as a bit of a commodity Many years ago, today, the use of the union is 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. Although they need that space to attract customers and we are seeing them go For longer term leases, both of which are good signs or the health of this business and a whole lot of that is driven by the e commerce Segment continues to be very diversified way over and above this name, John. They are definitely committing space ahead of Our customers, but they're definitely filling up those spaces. This is not 1999 or 2000 dot Tom, where people are going and hoping that their business will triple.

Speaker 2

They can't keep up. I mean, literally, that's the takeaway for all you guys. You can The market cannot keep up with the supply market cannot

Operator

Your next question comes from the line of Brian Peck from Wells Fargo. Your line is open.

Speaker 2

Great. Thanks. I wanted to touch on acquisitions in general, not This is Lou Anne who covered land plays as you touched on those earlier. You guys were able to use up under $400,000,000 at Higher than we've seen in a while. Is that just a mix issue or are you guys finding more opportunities to maybe acquire off market?

Speaker 2

And then related to that, what's given you the confidence to increase acquisition guidance when there's so much capital out there chasing deals? Yes. So the 5% is definitely a mix issue. Our acquisition activities, we're generally not out there to buy Four portfolios at the highest try and hit that highest bid. So we're constantly Sourcing deals off market and yes those do come with better returns.

Speaker 2

5% It is a mix issue. With respect to the confidence in the future, I mean frankly, as Sameet said Earlier on, we had a $330,000,000 quarter. We might have a $2,000,000,000 We might have a 0. It really depends on what's out there, what's available to us. And We have confidence in the next quarter because we have a lot of items already in the flyer.

Speaker 2

But confidence long term, Who knows? I mean, if these returns begin to completely blow out over replacement cost, You're not going to see us as active. The Edge Day is a strategic opportunity. You may have a quarter that's 10 times a quarter we had this. So it's tough.

Speaker 2

Acquisitions are high to forecast. They should be high to forecast, Yes. Keith, if somebody gives you a precise forecast for accuracy, he should run for the home. But there's also another Two, I think, important differences between us and others in the world. Our plan then is the globe.

Speaker 2

And that's lots of different ways to deploy capital than just in the U. S. I'm not saying, by the way, Europe I'm just saying we have really multiple ways of deploying capital. And secondly, a lot of the incremental capital that's Coming to the business is from allocators. It's from people that basically go and buy existing products and we can buy substandard product, just well located than fixed.

Speaker 2

And that even though there's competition in fact too, But the number of players in that fixed market hasn't grown as much as the number of market players in the I buy office

Operator

Your next question comes from the line of John Patterson from Jefferies. Your line is open.

Speaker 2

Great. Thanks. I'm just curious thoughts Maybe some of the structural headwinds that a lot of kind of the coastal gateway markets are facing, particularly New York and San Francisco, could you give us a call back to the office with a lot more kind of Your flexibility and expectations of migration more towards lower cost markets, lower tax markets. I'm just kind of curious how that impacts the industrial sector in your, I guess, willingness and underwriting And your, I guess, willingness and underwriting around developing and expanding in those markets. I think, I've honestly heard this, which will be being by the part of people who are in the other regions of the country Now for probably 20 years and every time you've invested on the mix of that pieces, you've left money on the table.

Speaker 2

So I don't see it. Yes. Are they high is Q1 Musk moving from California to Texas? Yes. Does he get a lot of headlines?

Speaker 2

Yes. He doesn't consume any more than somebody who makes $60 a year. So the big consumption bases are in these markets The land is covered with buildings. Those are the differences. The fact that they're sitting next to a beach, that's not so important.

Speaker 2

It's just that those populations Are still growing. We 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 maybe Chris you want to elaborate on this. So in terms of the distribution business, we don't have buildings that are in different places For servicing the Airman Corp versus the severance, they're all sort of within the same driving area.

Speaker 2

Now, I just had A couple of data points for you. First, the business has never been stronger when we look to California and New Jersey. Business is excellent from a demand perspective and a pricing perspective. As you look at real time migration data, and I'm specifically talking about the USPS data, you've seen migratory trends dissipate that is Slow down, so it is not continuing, it is not accelerating. If you look at other real time data for example the housing, you also see the same trend.

Speaker 2

So Just a couple of data points to reinforce the points that Amit is making. Let me just say this. It's not like California doesn't 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 homelessness is a real issue and all of those things are real issues.

Speaker 2

But at the end of the day, people go where the job process

Operator

we have a follow-up question from Manuel Torchmann from Citi. Your line is open.

Speaker 2

Thanks, Evelyn. Chris, one for you. In the past, you've talked about how much logistics is as a percentage of sort of overall There's some part of that relationship that messed up either with rents becoming a bigger piece or the other costs becoming a bigger piece? Thanks. Hey, Manny.

Speaker 2

Yes, it's our assessment that right now that ratio has not changed. And so for those who are not familiar with the data, Rent is roughly 5% of supply chain costs and supply chain costs roughly 5% of revenue. So, rent is about 25 basis points of throughput distribution. With the growth that we've seen in transportation costs, the growth we've seen in labor, that has impacted in excess of the market rent growth and so that ratio has not meaning to change. If anything,

Operator

We have a follow-up question comes from the line of Sibon Phuket Chiras. Your line is open.

Speaker 2

Thanks. A broad question for you. Your market cap is now over $100,000,000,000 Obviously, you've grown a lot over the past several years. And when you think about the Mental math that you do in terms of the economics you get from contributing 12 assets into the fund, when you're a smaller company, obviously that happens As you get bigger, I wonder when do we hit that point where you would want to keep more of your decelerate on balance sheet versus Yes, we don't I actually don't think that math Necessarily ever reached that point, and I think if we think about it, the reasons we've been in the private capital business Beyond scale, I mean they're 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.

Speaker 2

It's a very important business for us and we'll continue to do that in a meaningful way. But The key to our growth is not external growth. We've done more external growth than anybody on the planet, Our key is not external growth. The key is internal growth. That comes from portfolio construction And that comes from 20, 30, 40 years almost of meticulous steady work to build up these positions.

Speaker 2

And that's It enables us to get scale that drives down G and A ratios and base 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 are location Like look at all our 4 sided M and A deals. Some of them, probably between the 5 We've sold probably 30%, maybe 35% of the assets because we just don't We believe in those markets.

Speaker 2

We've kept the ones that we want. By the way, probably the right short term decisions will have been to keep those assets because Knowing what I know now, we should be more levered and have owned those assets. Well, frankly, that doesn't set us up as well for the long term. We'll make that up and there's some in the long term by having this portfolio in the right place. So organic growth and the external growth is rising on the page.

Operator

Your last question comes from the line of Jamie Feldman, Bank of America. Your line is open.

Speaker 2

You definitely said 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's certain markets that are getting better than others. UK is like the best market That's the way I think about it.

Speaker 2

I mean, that may not be price. But in terms of rental growth, The average of the continent is probably lower than the average of the U. S. Today. The cost of capital is lower In Europe, also compared to the U.

Speaker 2

S, interest rates are lower. So, I think they all make sense in the context of the cost of capital. But, UK is more are Postal U. S.-like and the continent is more like the rest of the U. S.

Speaker 2

Okay. Daniel, I think you're the wrap. So, I really appreciate everybody being on the call. I think we had about 780 of you on the call today, which is part of So I really appreciate the interest in the company and look forward to talking to you in the next couple of months.

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Earnings Conference Call
Prologis Q3 2021
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