Prologis Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2022

Key Takeaways

  • Prologis reported record financial results in 2021, with core FFO of $4.15 per share (14% growth ex‐promotes), Q4 core FFO of $1.12, 97.4% average occupancy, and 7.5% Q4 same‐store NOI growth.
  • Adopting a standardized net effective lease metric, Prologis’s lease mark‐to‐market jumped to 36% at year‐end, embedding over $1.2 billion of organic NOI to be realized without further rent growth.
  • Its Strategic Capital platform expanded to $66 billion AUM (95% owned), raised $4.4 billion of third‐party equity, achieved record $4 billion equity queues, and earned $0.05 per share of Q4 net promote income.
  • Development and stabilization metrics reached all‐time highs with $3.6 billion of starts at 32% margin, $2.5 billion of stabilizations at 53% margin, $817 million of realized development gains, and a $26 billion development runway.
  • For 2022, Prologis guides 6–7% cash same‐store NOI growth, 11% U.S. rent growth, 22% FFO growth to $5.00–$5.10 per share (10% ex‐promotes), $4.5–$5.0 billion of development starts, and modest leverage after $2.3 billion net deployment uses.
AI Generated. May Contain Errors.
Earnings Conference Call
Prologis Q4 2021
00:00 / 00:00

There are 15 speakers on the call.

Operator

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 Prologis 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.

Operator

Followed by the number 1 on your telephone keypad. It is now my pleasure to turn today's call over to Jill Sawyer, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Brent, and good morning, everyone. I'm standing in for Tracy today. Welcome to our Q4 2021 earnings conference call. To the supplemental document available on our website at prologis.com under Investor Relations. I'd like to state that this conference call will contain forward looking statements under federal to securities laws.

Speaker 1

These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates,

Speaker 2

as well

Speaker 1

as management's beliefs and assumptions. Forward looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward looking statements noticed in our 10 ks or SEC filings. Additionally, our 4th quarter results Press release and supplemental do contain financial measures such as FFO and EBITDA that are non GAAP measures. And in accordance with Reg G, we have provided a reconciliation to those measures.

Speaker 1

This morning, we'll hear from Tom Langer, our CFO, who will cover results, real time market conditions and guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Carless, Dan Leiter, Ed Nekritz, Gene Reilly and Colleen McEwen are also with us today. With that, I'll turn the call over to Tom. Tom, will you please begin?

Speaker 3

Thanks, Jill. Good morning, everyone, and thank you for joining our call. The 4th quarter closed out a year of record setting activity across our business. Core FFO was $1.12 per share with net promote earnings of 0 point 0 $5 For the full year, core FFO was $4.15 per share with net promote earnings of $0.06 Excluding promotes, core FFO grew 14% year over year. Net effective rent change on rollover accelerated to 33%, up 5 10 basis points sequentially and was led by the U.

Speaker 3

S. At over 37%. Average occupancy was 97.4%, up 80 basis points sequentially. Cash same store NOI growth remains strong at 7.5% for the quarter and 6.1% 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 REITs.

Speaker 3

This collaboration is an extension of the work we've done to harmonize other property operating metrics. We have a collectively 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 is 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 $1,200,000,000 for $1.55 per share that we will capture without any further market rent growth.

Speaker 3

Turning to Strategic Capital, this business continues to drive tremendous growth and value. In Q4, we completed the early wind up of our highly to the successful UKLV Venture. UKLV's $1,700,000,000 of operating assets were contributed to our PELF and PELP Ventures. We earned net promote income of $0.05 in connection with the closeout of this venture and our percentage of Infinite Live Vehicles has consequently grown to 95% of our $66,000,000,000 of third party assets under management. For the year, our team raised $4,400,000,000 of third party equity.

Speaker 3

After drawing down $1,900,000,000 in our open ended funds for acquisitions during the year. Equity Queues stood at a record $4,000,000,000 at year end. On the deployment front, we had a very productive and profitable year. Development starts totaled $3,600,000,000 with margins of 32%. We continue to maintain a long development runway with the land portfolio able to support $26,000,000,000 of future starts.

Speaker 3

Stabilizations totaled $2,500,000,000 with estimated value creation of 1.3 $1,000,000,000 and average margin of 53%, both all time highs. Realized development gains were $817,000,000 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.

Speaker 3

Fortunately, the scale of our 1,000,000,000 square foot to our financial performance. 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 62,000,000 square feet of leases and issued proposals on 90,000,000 square feet. Demand is diverse across a range of industry and to customers.

Speaker 3

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 3 forces. 1st, overall consumption and demographic growth require our customers to expand. 2nd, customer supply chains are still repositioning to address the massive shift to e commerce, as well as preparing for higher growth and service expectations.

Speaker 3

And 3rd, they need to create more resiliency in supply chains. Inventory to sales ratios are more than 10% below to pre pandemic levels. Our customers not only need to restock at this 10% shortfall, but build additional safety stock of 10% or greater. This combination has the potential to produce 800,000,000 square feet or more of future demand in the U. S.

Speaker 3

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.

Speaker 3

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 4th quarter, rents in our portfolio grew 5.7% globally and 6.5% in the U.

Speaker 3

S, bringing full year growth to records 18% 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, rising more than 12.5% globally, bringing the full year increase to a remarkable 39 Now moving to guidance for 2022, here are the components on an R share basis. We expect cash same store NOI growth to range between 6% and 7% and average occupancy to range between 96.5% to 97.5%. We are forecasting rent growth in our markets to be 11% in the U.

Speaker 3

S. And 10% globally. For Strategic Capital, we expect revenue excluding promotes to range between $540,000,000 $560,000,000 We expect net promote income of $0.55 per share for the year, almost all of which will occur in the Q3 and is driven by our PELTH venture. While a record, given the to 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 $4,500,000,000 to $5,000,000,000 with approximately 35% build to suits.

Speaker 3

Dispositions will range between $1,500,000,000 $1,800,000,000 2 thirds of which we expect to close this quarter. We're forecasting net deployment uses of $2,300,000,000 at the midpoint, which we plan to fund with $1,600,000,000 of free cash flow after dividends and a modest increase in leverage. To Project Core FFO including the $0.55 of net promote income to range between $5 $5.10 per share, representing 22% year over year growth at the midpoint. Core FFO excluding promotes will range between $4.45 4 point to $0.55 per share or year over year growth of 10% at the midpoint. Since our Investor Forum in 2019, Our 3 year earnings CAGR has been 13%, excluding promotes, well ahead of the 8% to 9% CAGR forecast we originally provided.

Speaker 3

Before closing out, I want to spend a minute on the quality of our earnings drivers and differentiators, which set Prologis apart from other real estate companies. We continue to drive strong organic growth and aren't reliant upon external growth to achieve sector leading results. In fact, approximately 75% of the increase to our core FFO for 2022, excluding promotes, is derived from organic growth, principally same store NOI and Strategic Capital Fee Related Earnings. It's important to point out that in 2022, our Strategic Capital revenue, including promotes, will be over $1,000,000,000 to a new milestone. This high margin business generates very durable fee streams with asset management fees marked to fair values each quarter, all while requiring minimal capital.

Speaker 3

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 $300,000,000 from procurement savings and essentials revenue. We will hit that target this year with more than $225,000,000 from procurement and $75,000,000 from Essentials. In light of our success with procurement and the fact that we have embedded this initiative into our platform, we will not provide to the Q1 of 2019. We also have a long development runway of $26,000,000,000 much of which comes from our international opportunity set, positioning us for continued strong value creation well into the future.

Speaker 3

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.

Operator

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

Speaker 4

Thank you. I wanted to ask if you could provide some color on the yields on development starts, which compressed 50 basis points to Clincher this quarter. I'm pretty sure this does not include the uplift in market rental growth of 10% you're expecting this year, but I just wanted to double check that was the case. But also was wondering how you view development yields and cap rates trending this year in a rising rate environment?

Speaker 5

Yes. So the answer to your question is yes. We have not included the to forecasted rents. So we underwrite based on what we see currently. So we're in this environment, we're seeing Returns compress, you should expect to see some compression in the development yield.

Speaker 5

Now mix also has a lot to do with that and that's something we can check out and maybe get back to you guys in the call down.

Speaker 2

In terms of cap rate trends, I don't think you want to pay any attention to our forecast since we've been consistently wrong for the last 5 years.

Operator

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

Speaker 4

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 an easy way to answer that is how much of your starts are pre leased or do you expect to get pre leased over the next couple of months and sort to Swayze that supply issue.

Speaker 2

Well, I'll start and Chris will have some data for you too, Manny. I think every year we've all forecasted supply exceeding demand and we're yet to have to see that happen after the global financial crisis. It will happen in some year. I just don't know whether it's this coming year or some other year. But I've never seen 70% pre leasing in 40 years of doing this in the development portfolio.

Speaker 2

And also, the interest in build to suits, I think, is a pretty good indication that the product just isn't there. And I'm willing to bet this is a counterfactual, but I'm willing to bet if there were more supply, there would be more absorption and more demand. People simply cannot get the space that they need. But I think it will be 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, to high barrier markets that our portfolio lives in.

Speaker 2

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. I'm not trying

Speaker 6

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 it's going to be next year. Chris? Yes, sure, Manny. So the numbers for this year look very strong market environment, 375,000,000 to 400,000,000 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 3.4%, 3.5% vacancy, so very low.

Speaker 6

Now this is especially true in our U. S. Global markets where we have an overweight strategy. In those markets, the under construction pipeline is just 3% of stock in a 70% pre leased. 2021 net absorption, so demand was 14% higher than that under construction pipeline.

Speaker 6

Now by comparison, our regional markets have 4.8% of their markets under construction. So our global markets are 180 basis points better. 2021 demand net net absorption was 12% below this under construction pipeline in the regional markets, so our global markets are to 25% better.

Operator

Your next question comes from Jamie Feldman with Bank of America. Your line is open.

Speaker 7

Great. Thanks for that color. Just as you think about when supply chain well, the first question, where are we or how much longer before you think supply chains do start to smooth out. But I guess even more importantly, because that's probably impossible to pick a date, What does warehouse demand look like when supply chains do smooth out? So of the type of demand that Tom outlined the different categories of demand.

Speaker 7

When supply chains smooth out, how much of that goes away?

Speaker 2

Okay. I think Tom answered your second question, but let me take another stab at it. We know This is a fact, it's not opinion. That supply that 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 and the goods economy has been on fire and people are buying a lot of stuff and not spending as much money on experience, etcetera.

Speaker 2

So that dynamic will change, but regardless, that 10% we'll have to snap back to a normal level and that's a source for demand. In addition to that, as we outlined in a paper that we But at almost a year and a half ago now, we believe there is at that time, we thought 5% to 10%, today we would say 10% to 15%, more demand, in other words, higher inventory to sales ratio 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.

Speaker 2

That is huge. And it is not driven by the fact that there's a bunch of inventory sitting around, certainly not in the U. S. And maybe sitting around in some plants somewhere, but in the U. S, there's no inventory around for it to go away.

Speaker 2

That's the problem, and that's what's creating the supply chain problem. Now, there were a lot of people smarter than me who predicted that the supply chain problems will be open would have been over by Christmas or after Christmas. 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 concerning, if you will, as it would have been, too many 60 minutes stories on that, that concern the politicians, but that's not the only indication of a supply chain problem. I mean, you could have to a product that has 50 different parts going into it and until the last part gets there, you can't ship that product.

Speaker 2

So that's a supply chain problem. The fact that you can't get truckers to pick up the goods from ports or transport them from point A to point B, that's a supply chain problem. I think all of those things are going to take multiple years to resolve themselves. So I think we're going to be in this mode for a while.

Operator

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

Speaker 8

Hey, everyone. Tom, I kind of want to go back to your commentary. You guys traditionally had said 8% to 9% FFO growth, ex promotes to CAGR since the Investor Day has been 13%. I believe you guys are already kind of at 10% with initial guidance here. I mean, in this part of the cycle where to market rent growth continues to be underestimated.

Speaker 8

Your mark to market grows, you're unleashing a little bit of the balance sheet with higher leverage here in that $2,500,000 of uses here. Kind of how should we think about maybe this point in the cycle trend till we get an inflection and how long could that last?

Speaker 3

Hey, Craig. So I think you're asking what's 8% to 9% if it was 8% to 9% back in 2019, 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 3.5% to 4.5%. And that has It

Speaker 2

was actually 3% growth on top of 3% growth in market rents on top of the mark to market that existed there. And I don't remember what that was. It was in the teens certainly.

Speaker 3

Yes. Under the our new methodology, I think that we were about 18%, I think give or take. Today, we're at 36%, so almost double, Right. So you can think about that in place to market alone is going to ratchet up our same store growth by more than 100 basis points, up to 150 basis points. So you should think about that level of same store for several years because that 36% in place to market growth is an average.

Speaker 3

So think about what it's going to be over the next year or 2, to be higher, right, because you're going to be rolling leases higher. And that 36% is not stopping. If you look at our guidance, right, for rent growth for the year and rent change. I would expect to see that in place to market build by the time we get to 2020 end of 2022. It's going to I think it's going to cross the 40 to Mark.

Speaker 3

So that same store is going to continue to grow and it's going to it's not a 1 or 2 year story. It's to 2, 3, 4, 5 year story. And again, that's with market rents not growing at 36%. So that's number 1. 2nd would be think about our strategic capital business, how we are scaling in that business, how our fees are growing without promotes, right?

Speaker 3

We saw asset values increase 39% overall for the year. Well, guess what? That increases asset values in our funds and our asset management fees increase as well. So 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 $0.02 I think we're going to be well ahead of that.

Speaker 3

So I could go on with differentiators, but that 8% to 9%, the new normal is I think what you're staring down with our core results this year.

Speaker 2

Craig, let me add 2 things to what Tom said, all of which I agree with. Number 1, you actually got our same store right better than most people, including us. So congratulations on that for the past. But going forward, look, 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.

Speaker 2

I mean, Tom mentioned Essentials. We have significant expectations for that business. Look at our labor CWI 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 EV charging. And we have actually committed to our first project in Southern California for EV charging on trucks.

Speaker 2

The ROIs on that business are off the charts. So we're not and by the way, I could go on for another to the stuff that's in the pipeline. So we're not sitting and just praying for the real estate aspects of our business. The most valuable We're really excited about the long term prospects. We didn't have that in 2019.

Speaker 2

Those things were a glimmer in our eye. Now their real business is producing real bottom line. So that's why I'm pretty optimistic about the future going forward. And remember, all of that is being done with sub 20 percent leverage. And external growth, yes, we have more external growth than anybody, but in relation to the size of our portfolio, external growth is almost an afterthought.

Speaker 2

We don't need to depend on that. That's a, in my opinion, lower quality source of growth because you're just arbitraging external capital to the internal cost of 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.

Operator

Your next question comes from the line of Ron Kamden with Morgan Stanley. Your line is open. Ron Kamden, your line is open.

Speaker 7

Yes. Thanks so much for the time. Congrats on the quarter. Just thinking about the same store NOI guidance for 2022, any more color on maybe the U. S.

Speaker 7

Versus Europe? And Maybe can you compare and contrast, how you expect sort of growth for next year in the two regions? Thanks.

Speaker 5

Yes. I'll throw in some thoughts on rent growth. Rent growth in Europe is catching up to the U. S. And we've seen this play out in the past.

Speaker 5

And frankly, it's catching up slower than we expected because vacancy rates across Europe have been lower than the U. S, but that's taking place now. And I think we and Chris, you ought to pile in here. This year, we'll see European rent growth that I think will exceed that in

Speaker 6

the U. S. Indeed, the vacancy rates are lower and the rent growth is accelerating. So It's an interesting point in time in the European markets.

Operator

Your next question is from Jon Petersen with Jefferies. Your line is open.

Speaker 9

Thank you. Just wanted to ask an accounting question. On the promote income, is that considered REIT income or is that in the taxable REIT subsidiary? And if it is REIT income, is that going to necessitate a large or potentially a special dividend this year just given the size of the promotes?

Speaker 3

The vast majority of it does come into the REIT itself versus the taxable REIT subsidiary. When 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 and 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.

Speaker 2

So when

Speaker 3

you see earnings growing at 22%, those promotes are landing in the OP in our REIT and Needs to be reflected on our dividend accordingly.

Operator

Your next question is from Nick Yulico with Scotiabank. Your line is open.

Speaker 2

Thanks. In terms of the guidance

Speaker 6

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?

Speaker 3

Sure, Nick. To So I'll preface it by, there are several factors that go into the promote, not just real estate valuation, there's FX considerations because it's a euro denominated fund, but that fund also has to functional currencies, not in euro, British pound, for example, right? So there's FX activity going on, functional and transactional transitional. 2nd would be there's debt mark to market in there. So a long winded way of saying that there are a lot of factors that impact it.

Speaker 3

From a from a valuation 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 once the promote exceeds to that top hurdle. You can have a lot of variability in either direction just depending on how things go.

Speaker 3

So to the funds based on 3rd 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'll keep you posted.

Speaker 2

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's an appraisal lag built into some of these valuations because The appraisers have a hard time keeping up with comps even today, the market's 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 value is promotable. So there's a lot of leverage on the upside and also on the downside.

Speaker 2

But if I were a betting person, I would take the upside on that, not the downside.

Operator

Your next question is from Anthony Powell with Barclays. Your line is open.

Speaker 10

Hi, good morning. I guess a follow-up on the promote question. Thanks for the color on 2020 free promotes. How should we look at this stream of income over the next few years? And Should we be valuing promote at a higher multiple than historical given kind of the recurring increasing recurring nature and the growth of the valuation of the portfolio?

Speaker 2

Let me take a stab at this. The issue with our promotes is this. We have 2 huge open ended funds that are promotable, and those are on 3 years promote cycles. So 2022 and 2023 are big promote year is just like 2020 and sorry, 2019 2020 were, except more so. So the 3rd year, We have some small funds in that year.

Speaker 2

This year, for example, is that 3rd year, which is relatively thin. We had this past year, We had UK those funds over time will grow. So this promote picture will become more even. We've also gone through a modernization of our funds terms. And given the investors the option of basically extending their promotable period to the lean years and also new capital coming in is going to have its promote tied to the year that the capital came in as opposed to a set year.

Speaker 2

So over time, you're going to see these promotes smooth 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 3 year cycle and average them. And I think the guidance that Tom talked about for this So year 2022 is actually not a bad number as sort of thinking about roughly that average over a 3 year period. And as to the valuation of that, look, you guys are you guys can do that better than us, but we're not getting Thank you for that and we should get something.

Speaker 2

So because the history is there, you can go back and look at it for 10 years under the 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 of promotable AUM with 60% of that 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

Speaker 3

in this cycle. And you've certainly seen our AUM grow and continue to grow. So the underlying base to Emite's point It's growing rapidly as well.

Operator

Your next question is from the line of Blaine Heck with Wells Fargo. Your line is open.

Speaker 11

Great. Thanks. Wanted to touch on acquisitions quickly. It looks like you guys came in light this quarter relative to guidance. And I Acquisitions are certainly tougher to forecast than what you're 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?

Speaker 11

And then Any broader commentary regarding your level of interest, especially in large acquisitions in 2022 would be very helpful. Thanks.

Speaker 5

Yes. There was nothing in the quarterly results is 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, to the big, small portfolios, etcetera.

Speaker 5

And prices have been moving up, obviously, in their competitive situations. But I think we're disciplined like we always have been with acquisitions. But We got great teams and we're on every deal.

Operator

Your next question is from Michael Carroll with RBC Capital Markets. Your line is

Speaker 2

open. Yes, thanks. Can you provide

Speaker 12

some color on your underwritten development margins? It looks like the margins in the 4Q 2021 and 2021 starts is below the in place pipeline and the recently stabilized assets. There's something there that's driving those lower or is it just conservative estimates?

Speaker 2

Well, our margins on starts have historically always been projected to be lower than our to actual margins of completion, because we don't count on things like super rent growth and as we talked about earlier or to cap rate compression or all those other things that have happened. And obviously, over time, we're using up the cheapest land and buying more and more of our land at margin. So and the kind of margins we've had in the last couple of years have been just on unprecedented. So over time, you should expect those kinds of margins to glide to a more normalized level as cap rate compression slows down and rental growth eventually will slow down. We can't keep going at in 20% a year.

Speaker 2

So that is not at all unusual. There's nothing specific going on that other than mix where in some years we're developing more here and there and there are different and our land bank has different ages in different jurisdictions. So So, I mean, it has a lot has a 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 see.

Operator

Your next question is from Dave Rodgers with Baird. Your line is open.

Speaker 12

Yes. Hi, everyone. Wanted to

Speaker 11

ask about just kind of

Speaker 6

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 or worse for them? And how that might be impacting any real estate decisions if at all.

Speaker 2

Labor is getting worse. Labor has been getting worse actually for to 10 years and the pandemic only just made it worse faster. I think that is forcing our customers into deploying more automation, because they have to, 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 Prologis is to invest in innovation and robotics and all kinds of other automation issues that help with the labor problem.

Speaker 2

Also CWI is a major step that we've taken in that in regard. But I will tell you this, the more of that technology is deployed in our buildings, the stickier the tenants become and probably the term of the lease will increase and turnover costs will go down. 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.

Speaker 2

It exists in other parts of the world, but it's particularly acute in the U. S. And there are lots of theories as to the reasons for it, but I'm not smart enough to know which ones make sense and which ones don't.

Operator

Your next question is from Tom Catherwood with BTIG. Your line is open.

Speaker 13

Thank you, and good morning, everybody. Tom, going back to something you mentioned in your opening remarks, you were talking about the $26,000,000,000 build out to the potential on your land bank, and you mentioned that it's underpinned by an international opportunity set. Developments obviously jumped in to 2021, but they seem to be weighted more towards the U. S. Than they were in 2019 2020.

Speaker 13

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.

Speaker 5

Yes. So if you look at the composition of the land bank, our auction land and covered land place. So this is almost 200,000,000 square feet of build out opportunity. It's about 2 thirds in the Americas and a third outside of the Americas. So that's the balance and the pace at which the cadence at which We take it down and it will be opportunity driven.

Speaker 2

The other thing I would say is that, if you look at our 20 year track record of development profits, Actually 2 thirds have come from overseas and a third from the U. S. And again, that's a differentiator for Prologis where We just have a bigger playing field and to make money.

Operator

Your next question comes from the line of Vince Tibone with Green Street. Your line is open.

Speaker 6

Hi, good morning. I want to follow-up on the lease mark to market. Could you share the estimated mark to market on a cash basis? And also share the typical annual escalators you are getting on leases today.

Speaker 3

Yes. On The cash in place to market today is right around 30%. And from an escalator standpoint, I think what we're seeing today with Collaters would clearly be in the 3s. And in certain markets, it's in the 4s and potentially even higher. So I would tell you there when we think about all this, escalators are certainly important.

Speaker 3

But at the end of the day, our teams are trying to drive the highest to cash flows of the Canada lease. Bumps are a part of that, starting rents are part of that, TIs 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 you're driving out of leases.

Speaker 2

We are NPV investors on leasing and the profile of it is usually our And that's on a market wide basis. We were able to mitigate about 7%

Speaker 5

of that increase or 7 percentage points of the increase. So our net increase that we absorbed last year was 24%. So we feel like most of that is a competitive advantage against to our competitors. And there's 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 for 2022.

Speaker 2

By the way, then let me tie that to some of the earlier questions. When you're getting this kind of escalation on replacement costs, and by the way, I would say land prices have gone up even at a higher rate than that, It's nice to own already a 1,000,000,000 square feet of this kind of real estate. So particularly 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 brilliance. That's just dumb luck.

Speaker 4

Your next

Operator

question is from Caitlin Burrows with Goldman Sachs. Your line is open.

Speaker 1

Hi, there. I guess just considering your expectations for 'twenty two and the guidance you've laid out, to give any details on what portion is already known, like for example leases signed in 2021 that will commence in 2022. You already know that timing and rate, but for the parts that you don't already know, like lease commitments in the second half or pace of development stabilization, What sort of assumptions are you making? Is it that the strength of 'twenty one stays the same, improves further or slows and kind of what's driving that?

Speaker 2

I would say, Caitlin, there are very few things that haven't happened already in that will affect 2022 one way or another, because even if we get it wrong on rental change on one side or the other, We've put away so many of our rollovers already in for 2022, that there isn't that much opportunity on the margin to sort of affect that in a big way. So there's 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 stabilizations and all that are more of a future year type of thing.

Speaker 2

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 to the bank pretty much any year at this time.

Speaker 3

And then I'd go back just to the in place to market that $1,200,000,000 of NOI that we will capture with no market rent growth. That gives you a high level of certainty regarding to the same store growth going forward. So the things you need to think about is, if rent growth outperforms in 2022, that's going to take to that $1,200,000,000 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 confidence why our growth will be continue to be sector leading for many years to come.

Operator

Your next question is from Derek Johnson with Deutsche Bank. Your line is open.

Speaker 4

Hi, everyone. Thank you. Our rising rents and revenue growth still handily outpacing the supply chain and efficiencies, inflation and really overall expense growth. How do you view rents versus expenses, linked expenses playing out in 2022.

Speaker 2

I'm not sure I to the question completely. Expenses are obviously going up as well, but they're 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 are 3%, 4% of the total picture. So, cost of drivers, cost The 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 sensitivity to the real estate costs if there is a commence or an increase in productivity that comes along with that.

Speaker 2

I think that's what you asked, but We'll give you an opportunity to clarify here if that's not what you're asking.

Speaker 4

Thank you.

Speaker 2

Okay. All right. Thanks.

Operator

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

Speaker 14

Hey, good morning, Eric. Michael Bilerman. Amit, I want to come back to you gave an answer where you said You're not going to predict cap rate trends because you've been consistently wrong for the last 5 years. And I want to sort of dive into sort of the components that made you wrong over the last 5 years. I get rents have been stopped dramatically and NOI is so important as a numerator, that the denominator of the cap rate really does impact your capital allocation decisions, what to buy, what to sell, what to develop, how you raise capital on the balance sheet and all those sort of inputs.

Speaker 14

So 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 be wrong over the last 5 years and how that informs your decision going forward.

Speaker 2

Look, we've taken our best shot and we do have a view on these things. After all, we give you guidance and we've done that for 25 years. So we do have a view. And our view has 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 80s 90s and cap rates were 9% 10% for logistics in those days. So as the cap rates have marched down in the last 20 years to where they are today, I don't know, 3% to 4%, We are anchored in the past.

Speaker 2

So it always feels like it's a little expensive and all that. But There are a couple of things that have changed. Logistics has first of all, general interest rates and all that have driven capital market returns down for everything, stocks, bonds, everything, including real estate. But I think there has been a better appreciation of logistics real estate as an asset to the class that has caused logistic cap rates to compress further than maybe some other property tax that have compressed less back to long term interest rates and their direction. But I can tell you, the weight of the money is accelerating.

Speaker 2

It's not slowing down. The other thing is that I think if you're uncertain about the inflation outlook, which is what a lot of the discussion is, is it inflation, is it Supply chain is a short term, is it long term? Not a bad thing to own modestly leveraged real estate in an asset class that's in equilibrium, actually better than equilibrium, couple of 100 basis points tighter than equilibrium, when you have replacement costs that give you that 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 as Gene talked about. That's just the future buffer that we haven't started talking about yet. So I think rental score I have been consistently in our company, low on rental projections, but higher than all my colleagues.

Speaker 2

Low compared to what actually happened, but higher than all my colleagues. And I expect that to continue for some time, but I think it's imprudent in a year where you've had this kind of spectacular rental growth to go out there and project 10 more years of that. I mean, and 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 We report it to you every quarter. So we try to get it as close to the pin and as the pin moves, we'll move.

Speaker 2

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 were the last question. So maybe this is a wrap up. Look, as you think about our company, it's really important to get cap rates right, really at least in the long term to get rental growth and all those things right.

Speaker 2

And we will out compete on those basis all day long. But this company is increasingly becoming a multiple product line cash flow generating type of business. Tom mentioned $1,000,000,000 coming out of our private capital franchise with essentially no capital because to our co investment, which is in the rent business. So the essentials business, we sort of gloss over it, but it's a $75,000,000 a year business now. It can be a $1,000,000,000 business.

Speaker 2

The EV business can be a $1,000,000,000 business. I'm not saying that it is or whether it's going to happen in 2 years, but Increasingly, we're building these cash flows on top of the base real estate business because eventually the real estate business We'll slow down, but the ability to do business with those customers that use our real estate, I think is a runway for us for multiple decades. 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.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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