Prologis Inc (PLD) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by.

Welcome to the Prologis Quarter 3 2021 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would like to hand the conference over to your speaker today, Tracy Ward, Senior Vice President, Investor Relations.

Please go ahead.

Thanks, Sarah, and good morning, everyone.

Welcome to our third quarter 2021 earnings conference call.

The supplemental document is 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 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.

Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors.

For list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings.

Additionally, our third quarter results press release and supplemental do contain financial measures such as FFO 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 first cover our results, real-time market conditions and guidance.

And also here with me today are Hamid Moghadam; Gary Anderson; Chris Caton; Tim Arndt; Mike Curless; Dan Letter; Ed Nekritz; Gene Reilly; and (inaudible).

With that, I will turn the call over to Tom.

And Tom, will you please begin?

Thanks, Tracy.

Good morning, everyone, and thanks for joining our call today.

Third quarter results exceeded expectations and were underpinned by record increases in market rents and valuations.

Operating conditions are being shaped by structural forces that continue to drive demand.

At the same time, vacancies are at unprecedented lows.

Space in our markets is effectively sold out.

In the last 90 days, supply chain dislocations have become even more pronounced, with customers acting with a sense of urgency to secure the space they need.

As demand surges, having the right logistics real estate in the right locations has never been more mission critical to our customers.

During the third quarter, we signed 56 million square feet of leases and issued proposals on 84 million square feet.

Spaces above 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 2021 U.S. forecast for net absorption by 14% to a record 375 million square feet against deliveries of 285 million square feet, resulting in year-end vacancy reaching a new low of 4%.

I want to point out that we revised our data set here this quarter to reflect only Prologis markets.

As strong demand is being met with historic low vacancy, pre-leasing in the U.S. delivery pipeline has reached 70%, its highest level ever as customers continue to compete for space.

Acute scarcity in our global markets is driving record rents and value growth.

In the third quarter alone, rents grew 7.1% in our U.S. markets, far exceeding our expectations.

We are increasing our 2021 market rent forecast significantly to an all-time high of 19% from the U.S. and 17% globally, both up approximately 700 basis points.

Our in-place-to-market rent spread jumped 500 basis points in the quarter and is now approximately 22% with an upward bias.

This current rent spread represents embedded organic NOI growth of more than $925 million or $1.25 per share.

Record rent growth is translating to record valuation increases.

Our logistics portfolio posted the largest quarterly increase in our history, rising 9.5% globally, bringing the year-to-date increase to an impressive 4% -- an impressive 24%.

Sorry about that.

We expect that the ongoing network reconfiguration and expansion required to meet consumer needs and minimize disruptions will fuel demand 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.

Rent change on rollover was strong at 27.9%, slightly lower sequentially due to mix.

Average occupancy was 96.6%, up 60 basis points sequentially, and we reached 98% leased at quarter end.

Cash same-store NOI growth accelerated to 6.7%, up 90 basis points sequentially.

We had a very productive quarter on the deployment front.

Margins on development stabilizations remain elevated, coming in at 47%.

Our development starts were $1.4 billion, consisting of 31 projects across 21 markets with estimated value creation of more than $520 million.

Turning to strategic capital.

Our team raised almost $500 million in the third quarter and $2.5 billion year-to-date.

Equity [cues] for our open-ended vehicles were $3.4 billion at quarter end, another all-time high.

Moving to guidance for 2021.

Our outlook has further improved, and here are the key updates on an our share basis.

We're tightening and increasing our cash same-store NOI growth to now range between 5.75% and 6%.

We're increasing the midpoint for strategic capital revenue, excluding promotes, by $12.5 million and now range between $480 million and $485 million.

We expect net promote income of $0.05 per share for the year, an increase of $0.03 from our prior guidance.

In response to strong demand, we are increasing development starts by $450 million to a new midpoint of $3.7 billion.

Our owned and managed land portfolio now supports 180 million square feet and more than $21 billion of future build-out potential, providing a clear runway for significant value creation over the next several years.

We're also increasing the midpoint for acquisitions by $500 million.

The increased pace of acquisitions relates to our focus on covered land plays and urban Last Touch opportunities.

We now expect net deployment uses of $650 million at the midpoint.

Taking these assumptions into account, we are increasing our core FFO midpoint by $0.06 and narrowing the range to $4.11 to $4.13 per share.

Core FFO, excluding promotes, will range between $4.06 and $4.08 per share, representing year-over-year growth at the midpoint of almost 14% while deleveraging by more than 300 basis points.

We expect to generate $1.4 billion in free cash flow after dividends with a very conservative payout ratio in the low [60%] range.

While our year-to-date results have been extraordinary, most of the benefits from the current environment will accrue to the future.

Our 22% in-place-to-market rent spread, the valuation impact on promotes, our leverage capacity, the $21 billion of development build-out, and most importantly, the vast opportunity set that our global footprint provides all paved the way for both significant and durable long-term growth.

As I mentioned at the outset of my remarks, the disruptions within the supply chain won't be solved overnight.

Prologis plays a unique role in the industry, and we're committed to helping find long-term solutions.

That's why we're working closely with our customers, policymakers and community partners to help address the problems, which range from warehouse space to transport infrastructure to labor scarcity.

In closing, I want to highlight 2 important upcoming Prologis events.

First, this Monday, we'll be hosting a webinar that will dive into our development and strategic capital businesses.

And second, on October 27, 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 Instructions) Your first question comes from the line of Caitlin Burrows from Goldman Sachs.

Maybe just the earnings release mentioned that your investment capacity is around $15 billion.

Do you think Prologis will actually be able to deploy capital and use that opportunity?

And if so, how?

Or do you think that spread could actually increase as cash flow increases?

Caitlin, it's -- as you know, we really never provide guidance, at least voluntarily, on deployment because, as I've said many times, it can range between 0 and a lot.

Last year, it was $21 billion.

So I don't know, honestly.

It just depends on the returns that are available.

And the only reason we talk about capacity is that you sort of have a feel for what we can do if the right opportunities came about.

But there's no urgency around investing in a particular time frame.

Your next question comes from the line of Emmanuel Korchman from CITI.

Tom, I kind of wanted to reconcile a point you made earlier in your script, which was that customers are keenly focused on getting more space.

And we're reading a lot of headlines on shortages of inventory, of labor, of other things.

I guess help me reconcile the 2 points with customers looking for space that maybe they can't fail right away.

Are they just expecting those supply pipelines to rebound quickly?

Or are they moving stuff from other warehouses?

Or sort of, I guess, it's a little bit counterintuitive for somebody to be taking more space when product is sort of an issue right now.

Sorry for the long question.

Yes.

Manny, 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 think of it as a big long hose, and somebody turned off the water and the hose ran dry.

And as the economies came back, that hose got opened and production started, and it's now flowing through the supply chain.

So it is not flowing 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 product inventory, sort of ends up piling up in different places because if there's one part missing into something, it's going to hold up the inventory.

The other 99 parts have to be stored somewhere.

So it's creating a pretty significant extra demand just to balance out the system given that the buffers are not predictable anymore.

So the natural follow-up question from that, I would guess, would be, well, do you guys think about this being a onetime event or a sustainable event?

And I would say this particular factor is likely to be a temporary, although probably 2 or 3-year type of process before everything straightens out.

But right behind that are the 2 big structural drivers that on top of normal absorption, they include increased share of e-com and inventory levels being higher than the pandemic.

And those 2 things people aren't even thinking about right now because they're struggling to keep their heads above water.

So I think the short-term thing is really interesting.

It's great for headlines and all that, but I think the much more interesting factor in terms of assessing the quality of our business is a long-term driver -- or the 2 long-term drivers of demand on top of the normal targets of demand.

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

Excellent.

Quick question on cap rates.

We've seen incredible compression this year.

And unlike prior years, it really seemed to be across the board.

Does that create any risk in certain markets or regions where fundamentals and demand may not meet kind of the lofty valuation expectations we now have?

Boy, that's a tough question to answer.

I'll give you mine.

And Gene, I'm sure we'll have ideas about this.

First of all, we're notoriously bad in predicting cap rates.

We've been saying for about 5 years that they're too low, only to watch them go lower.

But remember, cap rates are a function of 2 things.

One is general returns available in other capital markets and the interest rates or risk-free rates.

And more recently, the 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 compressing.

I suspect it has more to do with the embedded growth rate in the last 6 months than it does with interest rate picture.

In fact, the interest rate picture, if anything, has increased.

But the tremendous growth in rents, I think, has way exceeded the drag from slightly higher interest rates.

Gene, what do you think?

Yes.

I think you may be getting to the spread between primary and secondary markets.

And that actually hasn't tightened up that much.

It has tightened up a little bit.

But spot cap rates in primary markets are extremely low.

So I think there's always 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.

But we'll see how it plays out.

But I don't really think -- and Chris may have a different point of view -- that those spreads have actually tightened that much further.

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

We get asked a lot about just the potential supply coming online with so much capital flowing into this sector.

Can you talk a little bit about whether it's a competitive mode or just kind of how Prologis will be able to kind of protect itself as supply grows?

Or maybe that's the wrong way to think about it?

Just how should we think about the supply risks overall, and it's not so easy to build?

Yes.

I think you should think of supply risk as very market-specific.

And you can have all the desire to bring on supply in L.A. or San Francisco or Seattle or even Inland Empire in -- certainly Inland Empire West or New Jersey, take all your good markets.

If -- I mean how are you going to do it?

There is no land -- And their entitlement picture is getting to be harder and harder every day.

Even markets like Dallas that we historically would have discussed as -- or referred to as non-constrained in terms of land, believe it or not, are getting more constrained.

I still [don't count] constrained, but they're more constrained certainly in the good locations.

So I think the big driver is that it's just hard to come up with the land to build buildings on.

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 good spaces and all the inbound calls we get from all our good customers wanting to gain an advantage over another good customer, it is -- people are kind of in a panic mode almost when it comes to buying or committing to real estate.

So demand is just crazy.

So Jamie, I'd also add that it's market-specific.

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 a weak market, we're always monitoring where is that supply going to come from.

So I don't think it really changed our protocols in that sense.

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

In January, on 4Q '20 earnings call, your in-place-to-market rent spread stood at 12.8%.

And with that in-place-to-market now at 22%, just 9, 10 months later, what are the key drivers for this change?

And really, how sustainable is this mark-to-market across the portfolio?

Yes.

I'll take that.

So I'll anchor you back.

Well, 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 we have very minimal role in the fourth quarter and given our market rent growth expectations.

So I would expect the 22% is going to go higher when we're on this call in January.

One thing I would anchor you back to is 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%.

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 has arguably gotten even longer.

So the underpinning of the organic growth potential that we have is sitting right there for you to see.

Yes.

The only thing I would add to Tom's comment is actually, land prices in most markets are going up faster than rents, and construction costs are going up faster than rents.

So actually, the rent required for that marginal square foot of supply is ahead of that 22%.

So that's why the arrow is up.

It's just -- it -- we're running but sort of spending still are going a little backwards with respect to keeping pace with replacement costs.

Your next question comes from the line of Ki Bin Kim from Truist.

So wanted to talk about your development pipeline has obviously grown very nicely to $5 billion.

Can you remind us for the hard cost like how much of the costs are hedged or at least the material security options?

And as those expire and the favorable vintage of those hedges expire, what kind of impact could it have to your future development in terms of margins or yields?

So Ki Bin, we think we've contained about 25% of the cost increases we've seen to date.

So in the -- in our pipeline in terms of the starts going forward, there's probably 4% sitting there that -- beyond the underwriting of those projects.

Most of that is going to be picked up in contingency.

But as we look forward, we don't really see risk.

I'm not going to get into the details of what we've done with prebuying steel and other components on these projects, but I think we've mitigated quite a bit so far.

We do see these markets kind of stabilizing at this point in time.

And the other thing that we've done, which is really critical, is we've maintained our schedules.

And I think today, I think we've picked up 30 days of schedule versus the market.

And frankly, we build these buildings faster than the market anyway, but that's an incremental 30 days.

So the supply chain disruptions aren't just cost.

They're schedule.

So I think your -- I mean, ultimately, you're getting to how much have we sort of mitigated.

I've told you what we've done so far.

We're probably out probably 6 months ahead of the curve, but you can't really get much further than that.

So I feel really good about what we've done this year, and I feel like we're prepared really well going forward.

So we feel good about the outlook.

And obviously, we're raising guidance in our volumes.

Yes.

I think more importantly, than hedging construction cost is the fact that rents are going up faster than some of these costs if you take an overall average and certainly in the best markets.

So that's why margins are expanding with cap rates being -- also compressing.

So, so far, so good.

Will it continue forever?

Probably not.

Your next question comes from the line of Ronald Kamdem from Morgan Stanley.

Congrats on the quarter.

Just a quick one on just retention shooting up, up 650 basis points year-over-year.

Any color of what drove that tenant-specific geographic?

Just curious there.

Nothing unusual about mix or geography.

But as we said, customers don't have options.

Really, a lot of places to go.

And I think there's a race to secure really good, well-located real estate, and that's what we're seeing.

That number can be very volatile quarter-to-quarter.

Honestly, I wouldn't pay too much attention to it over a quarter.

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

I was wondering if you can comment on how you see occupancy trending with your lease rate now at 98%, but you're also pushing rents harder and also if you can comment on the big sequential increase in occupancy in Asia during the quarter.

Occupancies have to go higher.

I mean if your demand is 300 and whatever 85 -- supply is 285, there's 100 million feet that's going to come out of somewhere.

And add to that, the obsolescence, a significant amount of product that gets taken out of circulation because people built 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.

In the long term, we need to see.

I don't expect 385 million square feet of demand being the new norm forever because some of it is just people being desperate for putting their stuff somewhere.

But I think it will stabilize at the higher level than historical because of those 2 unique drivers that we're seeing in this cycle that we didn't have in other cycles.

John, your question on Asia, that's being driven by China.

Just we've seen some good -- very good lease-up activity in China.

Japan remains extremely high occupied.

The new team in China has done a really great job.

(inaudible)

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

Just curious on the rent growth piece of things you guys have talked a lot about today.

But is there a chance in your negotiations, are you guys trying to push escalators higher as a way to combat potential inflation here in the near term and just maybe smooth out some of the rent increases some of these times they have the big sticker shock at the end of the lease?

Right.

Well, there's a variety of rationale for that.

But the 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 in a straight line in any way.

But I think it's just -- it's hard in parcel with overall net effective rent growth.

So we feel pretty good about that.

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

Most of my questions have been asked.

But just on the development increase, I'm just wondering if you could maybe talk about regions, kind of where you're seeing the most demand and if you kind of thought about spec versus build-to-suits, I mean, given your commentary about customers.

And how do you sort of see that trending moving forward?

Yes.

So Steve, I'll take the first part of it.

So we've got about 100 projects we're starting this year.

So it's really broad-based.

And I wouldn't say that the increases are targeted to certain areas because, frankly, we have so much demand in all the markets.

We're pulling forward projects that we can, number one; and number two, a lot of this increase is build-to-suit activity.

And maybe Mike can comment on that.

Yes, Steve, (inaudible) up, 60% of activity was build-to-suit.

That will normalize end of the year in the mid-40s.

But I remind you that's going to be on a much larger base, which is a representative a few basic things.

There's fewer spec opportunities for people to move into, and that's paired up with major structural rollouts that are well underway with a whole lot of companies over and above Amazon.

So we see a bunch of diverse activity there.

And no surprise, margins are as solid as they've ever been, reflective of how important entitled land sites are.

And again -- and the dirt available space out there is putting us in a really good spot on bonuses.

Your next question comes from the line of Brent Dilts from UBS.

So with the shortages of certain items in the supply chain, how is that impacting your procurement programs for tenants for things like forklifts, lightings, rack, et cetera?

And also, how are your tenants managing labor challenges against the backdrop for record demand?

Yes.

Certainly, there's delays in some of our essential projects as well, forklifts, racking, those sorts of things.

So OEM manufacturers and those businesses are also struggling.

So lead times are longer.

But we're using again our leverage and our scale just as we do on the construction side of the business to procure them quicker than they otherwise would be able to.

On the labor front, I don't know if you guys want to channel that.

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 lots of companies on TV on what they're doing there.

It's also having them focused on more on automation, and we're seeing plenty of discussions about automation.

And automation these days is not the old version of it where it's fixed, bespoke.

We're seeing lots of flexibility out there in terms of robotic forklifts and autonomous forklifts and those types of things, which we think our buildings are very well suited because the primary criteria for that is a good floor, and we spent over 30 years making sure our floors are in really good shape.

So we think we're in real good shape to address automation, which I think will be a function of this labor issue going forward.

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

Tom, you previously talked about base case annual promote levels.

How does that change for where cap rates have moved to today?

Yes.

As a reminder, we talked about, call it, $0.07 of annual promotes if you -- the 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 historic run rate.

Now 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 pref return, that incremental unit of return produces promote.

Whereas getting up to your pref rate, you're not getting any promote.

So for sure, it will expand non-linearly.

Your next question comes from the line of [Anthony Powell] from Barclays.

Question about the building and acquisition guidance, the increase there.

You talked about covered land place, Last Touch.

How competitive is the environment for acquisitions there?

And how are cap rates trending for those types of deals?

It's very competitive for Last Touch, there's no question.

And cap rates are tough to talk about because you have in-place rents, you're capping income that's literally all over the place.

So I'm not sure it's that constructive to talk about the cap rates, but it is competitive.

I think we have strategic advantage in the markets we want to be in 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 pretty effectively.

But it is competitive, and there's a ton of demand there, and that's not going to change.

The yields on our covered land place, the entire portfolio cover land place, which is about 1/4 of our total land base is about 5%, which means that we're actually getting better yields on some of these covered land place.

And now some of it historic, and rents have gone up a lot.

But 5% is pretty good.

You're getting paid to wait.

And that's the way to carry land.

I mean the way to carry land is covered land place and options.

And really, the owned land that's just sitting around there, that's the most expensive way of carrying land.

So we've been on to the strategy for a long time, and we have a good base of covered land place that are now sort of cycling through development.

So a lot of our development in the next 12 to 24 months is going to be building out on the covered land place.

But the good news is we're replenishing that inventory and then some as we chew through it.

Yes.

Just to add on to what Hamid said.

So we have about 180 million feet of FAR build-out on our land bank, option land and covered land place combined.

So with the income flowing to the covered land place, we have about a 2% stabilized yield for the entire land bank, including all 3 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 the -- some of those income profiles on the early covered land place are -- have a serious up arrow to them.

So another way to think about land exposure.

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

So could we see leasing activity or demand improve as these supply chain disruptions dissipate and inventory levels improve?

Or are customers just looking through these problems right now and really trying to build their logistics network that they need over the next 3 to 5 years?

I think they're doing both, but I think most people are focused on just dealing with Christmas.

I mean, literally, they should be thinking about the long term, and people are some of the larger, more sophisticated players are, and those would be the targets of the world, Home Depots of the world, people like that.

But there are lots of people just trying to survive the next 3 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.

Your next question comes from the line of Dave Rodgers from Baird.

Yes, most of my questions have been answered, but I did want to just follow up on the labor point.

Obviously, labor a big concern today.

400 million square feet of additional demand kind of in the last 4 quarters alone.

Are you seeing customers just 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 just seeing kind of imminent decisions that are changing due to labor?

People have to figure out where their customers are, and the networks are based on where the customers are.

And real estate and real estate costs are at 3% to 5% of the total cost.

And by the way, that number hasn't gone on -- gone up because the rent is going up because the other components, labor, transportation, energy are also going up.

So they're not going to optimize around real estate costs.

They're going to optimize around where the consumers are and where -- how long it takes to get them there what they want.

And it's mostly time, not cost.

So they're going to have to operate in the big markets.

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

It's not a cost thing.

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

I just wanted to follow up on the leasing market, and in particular, the 3PL market, which has been incredibly active year-to-date.

Can you just talk a little bit more about the trends you're seeing there?

I imagine -- we've heard your anecdotes of like increasingly maybe Amazon using that market because it's easier to get space on a real-time basis.

Any perspective would be very helpful.

Yes.

This is Mike, and 3PL activity was up 500 bps last quarter.

And we've seen this really proud over the last several years where 3PLs might have viewed space as a bit of a commodity many years ago.

Today, they are viewing as an offensive weapon to help accommodate their customers, and we're seeing this play out in the form of them.

Leasing more space than they have underlying customers lined up for because they need that space to attract the customers.

And we are seeing them go for longer-term leases, both of which are good signs of the health of this business, and a whole lot of that is driven by the e-commerce segment, which continues to be very diversified way over and above just Amazon.

They are definitely committing space ahead of having customers, but they're definitely filling up those spaces.

This is not 1999 or 2000 dot-com where people are going and hoping that their business will triple.

They can't keep up.

I mean, literally, that's the takeaway for all you guys.

You can ask about it in 15 different ways.

But the market cannot keep up with -- the supply market cannot keep up with the demand that's out there.

Your next question comes from the line of Blaine Heck from Wells Fargo.

I wanted to touch on acquisitions in general, not just specifically on the covered land place, as you touched on this earlier.

You guys were able to do just under $400 million at your share during the quarter at a 5% cap rate, and you increased guidance pretty significantly.

Can you just talk about what caused that cap rate on deals during the quarter to be higher than we've seen in a while?

Is that just a mix issue?

Or are you guys finding more opportunities to maybe acquire off market?

And then related to that, what's giving you the confidence to increase acquisition guidance when there's so much capital out there chasing deals?

Yes.

So the 5% is definitely a mix issue.

But our acquisition activities, we're generally not out there to buy core portfolios at the highest point and hit that highest bid.

So we're constantly sourcing deals off market.

And yes, those do come with better returns.

5% is a mix issue.

With respect to the confidence in the future, I mean, frankly, as Hamid said earlier on, we're -- we had a $330 million quarter.

We might have a $2 billion quarter.

We may have a 0. It really depends on what's out there, what's available to us.

And we have confidence because -- in the next quarter because we have a lot of irons already in the fire.

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.

Yet if there's a strategic opportunity, we may have a quarter that's 10x the quarter we had this.

So it's -- acquisitions are hard to forecast.

They shouldn't be hard to forecast, frankly.

Yes.

If somebody gives you a precise forecast for acquisition, you should run for the hill.

But there's also another 2, I think, important differences between us and others.

First of all, our playing [10] is the globe.

And that's lots of different ways to deploy capital than just in the U.S. No, I'm not saying, by the way, Europe is any easier, but 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 that's well located and then fix it.

And that -- even though there's competition in that, 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 buildings, some malls today and now I'm going to buy a warehouse because it's cool.

So that's the difference.

Next question comes from the line of Jon Petersen from Jefferies.

I'm just curious for your thoughts on maybe some of the structural headwinds that a lot of kind of the coastal gateway markets are facing, particularly New York and San Francisco.

Obviously, people are being called back to the office, but a lot more kind of flexibility and kind of expectations of migration more towards lower cost markets, lower tax markets.

And I'm just kind of curious how that impacts the industrial sector in your, I guess, willingness and underwriting around developing and expanding in those markets.

I think if -- I've honestly heard this wishful thinking by the part of people who are in other regions of the country now for probably 20 years.

And every time you've invested on the basis of that thesis, you've left money on the table.

So I don't see it.

Yes.

Are they high -- is Elon Musk moving from California to Texas?

Yes.

Does he get a lot of headlines?

Yes.

But he doesn't consume any more than somebody who makes $60,000 a year.

So the big consumption bases are in these markets, and 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.

It's just that those populations are still growing.

They took a pause last year, but they're still growing, and there's a lot of -- the vast majority of the movements are in the same region from maybe the urban core to the suburbs or something like that.

I mean there's a lot of data on this.

And 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 urban core versus the suburbs.

They're all sort of within the same driving area.

Yes, I just had a couple of data points for you.

First, the business has never been stronger.

When we look at California and New Jersey, business is excellent, both 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 has slowed down.

So it is not continuing.

It is not accelerating.

And if you look at other real-time data, for example, the housing, you also see the same trend.

So just a couple of data points to reinforce the points that Hamid is making.

By the way, doesn't -- 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.

But at the end of the day, people go where the job growth is, and that's where the job growth is.

(Operator Instructions) We have a follow-up question from Emmanuel Korchman from CITI.

Chris, one for you.

In the past, you've talked about how much logistics is as a percentage of sort of overall, whether it be product cost or distribution cost.

Has that just essentially stayed consistent now and the rise in rents is consistent with the rise in other costs?

And at some point, is that relationship get messed up either with rents becoming a bigger piece or the other costs becoming a bigger piece?

Manny, 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.

So throughput distribute (inaudible).

With the growth that we've seen in transportation costs, the growth we've seen in labor, that has, in fact, in excess of the market rent growth, and so that ratio has not meaningfully changed.

If anything, it's gone down a bit.

We have a follow-up question comes from the line of Ki Bin Kim of Truist.

Just a broad question for you.

Your market cap is now over $100 billion, obviously grown a lot over the past several years.

And when you think about the mental math that you do in terms of the economics you get from contributing developed assets into the fund, when you're a smaller company, I mean, obviously, that math works out very favorably.

As we get bigger, I wonder when do we hit that point where you would want to keep more of your development on balance sheet versus contributing to the funds at the same pace.

Yes.

We don't -- I actually don't think that math necessarily ever reaches that point, Ki Bin.

I think if we think about it, the reasons for being in the private capital business are beyond scale.

I mean they're mitigating currency exposure.

It's leveraging the return on our capital, et cetera, et cetera.

And we've got a good history and a good brand in that business.

It's a very important business to us, and we'll continue to do that in a meaningful way.

But the key to our growth is not external growth.

Now we've done more external growth than anybody on the planet, but our key is not external growth.

The key is internal growth.

That comes from portfolio construction, and that comes from 20, 30, 40 years almost of meticulous steady work to build up these positions.

And that's what's going to really in the long term drive earnings in this company and create value.

The deployment is great.

It's interesting.

It enables us to get scale that drives down G&A ratios and creates value that way.

It increases our liquidity, which reduces the cost of capital.

It does all kinds of things.

But at the end of the day, it's those location selections.

Like look at all our 4, 5 M&A deals.

Some of them probably -- between the 5 of them, we've sold probably 30%, maybe 35% of the assets because we just don't believe in those markets.

We've kept the ones that we want.

We could -- by the way, probably the right short-term decision would have been to keep those assets because cap rates have compressed.

We -- Knowing what I know now, we should be more levered and have owned those assets.

But frankly, that doesn't set us up as well for the long term.

We'll make that up and then some in the long term by having the portfolio in the right place.

So organic growth and the external growth is icing on the cake.

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

It looks like you're definitely seeing some meaningful rent growth in Europe.

Can you talk about how your ability to push rents there compared to what you're seeing in the U.S. and if there are certain markets that are doing better than others?

U.K. is like the best markets in the U.K., and the continent is like the average market in the U.S., minus 50 basis points.

That's the way I think about it.

I mean that may not the price.

But in terms of rental growth, I think the average of the continent is probably lower than the average of the U.S. today.

But the cost of capital is lower in the -- in Europe.

Also compared to the U.S., interest rates are lower.

So I think they all make sense in the context of the cost of capital.

But U.K. is more coastal U.S. like and the continent is more like the rest of the U.S.

Okay.

Jamie, I think you -- you're the wrap.

So really appreciate everybody being on the call.

I think we had about 780 of you on the call today, which has got to be a huge record.

So, I really appreciate the interest in the company and look forward to talking to you in the next couple of months.

Take care.

This concludes today's conference call.

Thank you for your participation.

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