Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I'd like to welcome everyone to the Prologis Q4 2021 Earnings Conference Call. After the speakers' remarks, we will conduct a question-and-answer session. It is now my pleasure to turn today's call over to Jill Sawyer, Vice President of Investor Relations. Please go ahead.

Thanks Brent, and good morning, everyone. I am standing in for Tracy today. Welcome to our fourth 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 a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our fourth 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 will hear from Tom Olinger, our CFO, who will cover results, real-time market conditions, and guidance. Hamid Moghadam; Gary Anderson; Chris Caton; Mike Curless; Dan Letter; Ed Nekritz; Gene Reilly; and Colleen Mckeown are also with us today. With that, I will turn the call over to Tom. Tom, will you please begin?

Thanks, Jill. Good morning, everyone, and thank you for joining our call. The fourth quarter closed at a year of record-setting activity across our business. Core FFO was $1.12 per share, with net promote earnings of $0.05. 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 510 basis points sequentially and was led by the U.S. at over 37%. Average occupancy was 97.4%, up 80 basis points sequentially. Cash same-store NOI growth remained strong at 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 what logistics REITs. This collaboration is an extension of the work we've done to harmonize other property operating metrics. We have 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 $1.2 billion, or $1.55 per share, that we will capture without any further market rent growth. Turning to Strategic Capital, this business continues to drive tremendous growth and value. In Q4, we completed the early windup of our highly successful UKLV venture. UKLV's $1.7 billion of operating assets were contributed to our PELP and PELP ventures. We earned net promote income of $0.05 in connection with the closeout of this venture, and our percentage of infinite life vehicles has consequently grown to 95% of our $66 billion of third-party assets under management. For the year, our team raised $4.4 billion of third-party equity. After drawing down $1.9 billion in our open-ended funds for acquisitions during the year, equity queues stood at a record $4 billion at year-end. On the deployment front, we had a very productive and profitable year. Development starts totaled $3.6 billion, with margins of 32%. We continue to maintain a long development runway with a land portfolio able to support $26 billion of future starts. Stabilizations totaled to $2.5 billion with estimated value creation of $1.3 billion and average margin of 53%, both all-time highs. Realized development gains were $817 million for the year, also an all-time high. These results are the product of our highly disciplined team and an incredibly strong operating environment. For our customers, the importance of the health of their supply chain and the real estate that underpins it has never been so critical. We believe the current global supply chain challenges will continue well beyond this year. Fortunately, the scale of our 1 billion square foot portfolio puts us in a unique position to help our customers address these current supply chain challenges. This includes shortening construction delivery times by navigating raw material shortages and leveraging our Essentials platform to procure warehouse equipment and services, so our customers can focus on their core operations. We're also investing in technology and talent to support our industry-leading sustainability objectives, including our efforts around renewable energy. Market dynamics today are highly favorable and demand has never been stronger. During the quarter, we signed 62 million square feet of leases and issued proposals on 90 million square feet. Demand is diverse across a range of industry end customers. E-commerce made up 19% of our new leasing this quarter, with further broadening of customer diversity. We signed 357 new leases with 265 unique e-commerce customers in 2021, both of which are high watermarks. Demand is fueled by three forces. First, overall consumption and demographic growth require our customers to expand. Second, customer supply chains are still repositioning to address the massive shift to e-commerce, as well as preparing for higher growth and service expectations. And third, they need to create more resiliency in supply chains. The inventory to sales ratios are more than 10% below pre-pandemic levels. Our customers not only need to restock at this 10% shortfall, but also build additional safety stock of 10% or greater. This combination has the potential to produce 800 million square feet or more of future demand in the U.S. alone. Collectively, these forces have placed a premium on speed to market and flexibility, driving demand for years to come. From a supply perspective, construction underway in the U.S. is approximately 70% preleased, which is well above the historical average. We believe demand will balance out with supply in 2022 and vacancy rates will remain at record lows in both our U.S. and international markets. Competition for limited availabilities produced yet another quarter of record rent and value growth. In the fourth quarter, rents in our portfolio grew 5.7% globally, and 6.5% in the U.S., bringing full-year growth to record 18% and 20% respectively, far exceeding our initial forecast. This growth, paired with continued compression in cap rates, is translating to record valuation increases. Our portfolio posted its highest quarterly value increase, 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 our 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.S. and 10% globally. For Strategic Capital, we expect revenue excluding promotes to range between $540 million and $560 million. We expect net promote income of $0.55 per share for the year, almost all of which will occur in the third quarter and is driven by our PELP venture. While a record, given the significant increase in rents and valuations, we would expect to see similar or higher promote levels in 2023. In response to continued strong demand, we are forecasting development starts of $4.5 billion to $5 billion, with approximately 35% build-to-suits. Dispositions will range between $1.5 billion and $1.8 billion, two-thirds of which we expect to close this quarter. We're forecasting net deployment uses of $2.3 billion at the midpoint, which we plan to fund with $1.6 billion of free cash flow after dividends and a modest increase in leverage. We project core FFO, including the $0.55 of net promote income, to range between $5 and $5.10 per share, representing 22% year-over-year growth at the midpoint. Core FFO, excluding promotes, will range between $4.45 and $4.55 per share, or year-over-year growth of 10% at the midpoint. Since our investor forum in 2019, our three-year earnings CAGR has been 13%, excluding promotes, well ahead of the 8% to 9% CAGR forecast we originally provided. Before closing out, I want to spend a minute on the quality of our earnings drivers and differentiators, which set 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 billion, a new milestone. This high-margin business generates a very durable fee stream with asset management fees marked to fair values each quarter, all while requiring minimal capital. In addition, we see growing earnings from our Essentials business, which allows us to expand our services and solutions beyond rent. When we introduced this business back in 2018, we set a target of $300 million from procurement savings and Essentials revenue. We will hit that target this year with more than $225 million from procurement and $75 million from Essentials. In light of our success with procurement and the fact that we have embedded this initiative into our platform, we will not provide specific procurement reporting going forward, instead focusing on Essentials. We also have a long development runway of $26 billion, much of which comes from our international opportunity set, positioning us for continued strong value creation well into the future. Lastly, these differentiators are all underpinned by the lowest cost of capital among REITs and unmatched scale that minimizes operating costs. In closing, while 2021 was a year of many records, the bulk of the benefit from the current environment will be realized in the future, providing a clear, tangible runway for sector-leading growth for many years to come. We are confident our best years are still ahead of us. With that, I'll turn the call back to the operator for your questions.

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

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

Yeah. So, the answer to your question is yes. We have not included the forecasted rent. So, we underwrite based on what we see currently. So, in this environment we're seeing returns compress. You should expect to see some compression in the development yield. 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. 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 five years.

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

Hey, good morning. In terms of your ramping start guidance and commentary from lots of other competitors in the logistic 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 preleased, or do you expect to get preleased over the next couple months and sort of a switch that supply issue?

Well, I'll start then Chris will have some data for you too, Manny. I think every year we've all forecasted the supply exceeding demand and we yet 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% preleasing in 40 years of doing this in the development portfolio. 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 of 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, high barrier markets that our portfolio lives in. And let's not forget about overseas because the dynamic 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 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.

Yeah. Sure, Manny. So, the numbers for this year look very strong market environment, 375 to 400 million square feet of both delivery and net absorption in our 30 markets. That'll leave the market vacancy rate at an ultra low all-time record 3.4%, 3.5% vacancy. So, very low. 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 and is 70% preleased. 2021 net absorption, so demand was 14% higher than that under-construction pipeline. 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 that net absorption was 12% below this under-construction pipeline in the regional markets. So, our global markets are 25% better.

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

Thanks for that information. As you consider when supply chains might start to improve, my first question is where do you currently stand on that, and how much longer do you anticipate it will take? More importantly, what does the demand for warehouse space look like once supply chains do stabilize? Regarding the types of demand that Tom discussed, how much of that demand diminishes when supply chains normalize?

I believe Tom addressed your second question, but I want to elaborate further. It's a fact, not opinion, that inventory levels in terms of inventory to sales ratios are 10 points lower than they were before the pandemic. This is largely due to people staying at home and a booming goods economy, where consumers are purchasing many items instead of spending on experiences. This situation will eventually change, but that 10% needs to return to a normal level, representing a source of demand. Additionally, as we noted in a report we released nearly a year and a half ago, we initially estimated a 5% to 10% increase in demand. Now, we believe it is more likely to be between 10% and 15% higher than usual or pre-pandemic levels due to the need for resilience. This estimate is supported by conversations with our customers. Therefore, we anticipate a 20% to 25% variance in inventory levels from where we are now to where we expect to be, which is significant. This situation is not caused by excess inventory sitting around, especially not in the U.S. where inventory is low, and this scarcity is contributing to supply chain issues. Some experts expected supply chain problems to resolve by Christmas, but that has not happened. The shipping delays are being managed by moving ships further into the Pacific to lessen the visual impact, but that’s not the sole indicator of supply chain issues. A product may require multiple parts, and it cannot be shipped until every part is available, which complicates things further. Similarly, the inability to get transportation for goods from ports is another aspect of the supply chain challenge. I believe resolution of these issues will take several years, and we will likely remain in this situation for some time.

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

Hey, everyone. Tom, I kind of want to go back to your commentary. You guys traditionally had said 8% to 9% FFO growth, excluding promotes. The CAGR since the Investor Day has been 13%. And I believe you guys are already kind of at 10% with initial guidance here. I mean, in this part of the cycle where market rent growth continues to be underestimated, your mark-to-market grows, you're unleashing a little bit of the balance sheet with higher leverage here in the $2.5 million 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?

Hey, Craig. I believe you’re inquiring about the change from 8% to 9% back in 2019 to today. Yes, it has changed for several reasons, which relate back to the differentiators I mentioned earlier. To start with same-store, my recollection is that the same-store figure presented at Investor Day was 3.5% to 4.5%.

It was actually 3% growth on top of 3% growth in market rent, up at the mark-to-market that existed there. And I don't remember what that was. It was in the teens certain.

Yes. With our new methodology, we started at around 18%, and now we are at 36%, which is nearly double. You can expect that improvement in market rates alone will increase our same-store growth by over 100 basis points, potentially up to 150 basis points. This level of same-store growth is sustainable for several years since the 36% in-place to market growth is an average. Looking ahead to the next year or two, it should be even higher as we renew leases at increased rates. The 36% growth is ongoing, and based on our rent growth guidance for the year, I anticipate this in-place to market figure will exceed 40% by 2022. Therefore, the same-store growth story is not just short-term; it will extend over the next few years. Additionally, consider our Strategic Capital business, which is expanding and our fees are increasing, excluding promotes. We saw an overall 39% increase in asset values this year, which will positively impact our funds and asset management fees. This segment continues to grow and contribute significantly. Regarding our Essentials business, we indicated at Investor Day that it would contribute 50 basis points of growth, roughly $0.02, and I believe we will exceed that expectation. Overall, the new normal we are facing with our core results this year is in the range of 8% to 9%.

Craig, I want to add a couple of points to what Tom mentioned, and I completely agree with him. First, you did a great job with our same-store figures, better than many, including ourselves, so congratulations on that. Looking ahead, the market is strong, and various portfolios will perform well in an environment of rising rents and decreasing cap rates. However, we’re thinking much further than that. Tom brought up Essentials, which we have high expectations for. Our CWI business started as a service to customers but is quickly evolving into a potential profit center. We’ve also assembled a team to invest in EV charging, with our first project already committed in Southern California for truck charging. The returns for that venture are incredibly promising. We're not just relying on the real estate side of things. The most valuable part of our business is the billion square feet of customers we serve who need a variety of additional services. We are very optimistic about our long-term prospects, which were not apparent in 2019. Now, these are viable businesses generating real income. That’s why I feel positive about the future. Plus, all this is achieved with less than 20% leverage. Regarding external growth, while we do have more than anyone else, it’s almost secondary relative to our overall portfolio size, and we don’t need to rely on it. In my view, it’s a lesser quality growth source as it involves arbitraging external capital against internal costs. Our growth is organic. So, I’m not only confident about the level of growth moving forward but also about the quality of that growth.

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

Yeah. 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. versus Europe? And maybe can you compare and contrast how you expect sort of growth for next year in the two regions? Thanks.

Yeah. 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. And frankly, it's catching up slower than we expected because vacancy rates across Europe haven't been lower than the U.S., but that's taking place now. And I think we and Chris ought to pile in here. This year we'll see European rent growth that I think will exceed that in 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.

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

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

The vast majority of it does come into the REIT itself, versus the taxable REIT subsidiary. When you think just about dividends, as we've talked about in the past, 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. So, when you see earnings growing at 22%, those promotes are landing in the op in our REIT and need to be reflected in our dividend accordingly.

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

Thanks. In terms of the guidance for this year on Strategic Capital and the promotes, Tom, can you just give us a feel for what level of asset value appreciation is assumed for the funds this year?

Sure, Nick. There are several factors that contribute to the promote, not just real estate valuation. There are foreign exchange considerations since it's a euro-denominated fund, and it also involves functional currencies that are not in euros, like the British pound. So, there are foreign exchange activities happening both functionally and transactionally. Additionally, there is depth mark-to-market involved. In summary, many factors impact the promote. From a valuation standpoint, we believe there is some modest, mid-single-digit valuation increase included. We are making our best estimate of where it will settle, but many variables can affect it. We'll keep you updated as those variables change, especially since once the promote surpasses the top hurdle, there can be significant variability in either direction based on how things unfold. The funds, determined by third-party appraisals, will reflect the reality, as will the interest rates and foreign exchange rates. We've made our best attempt to estimate those impacts, and we will keep you informed.

Yeah. 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 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. And obviously, as Tom explained, once you pass the waterfall, all of the additional values are promotable. So, there's a lot of leverage on the upside and also on the downside. But if I were a betting person, I would take the upside on that, not the downside.

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

Hi, good morning. I wanted to follow up on the promote question. Thank you for the insights on the 2020 repromotes. How should we evaluate this income stream over the next few years? Should we consider promoting at a higher multiple given the recurring nature and the growth of the portfolio's valuation?

Let me address this. The challenge with our promotes is that we have two significant open-ended funds that are eligible for promotion, and these operate on a three-year promotion cycle. Consequently, 2022 and 2023 are substantial promotion years, similar to 2019 and 2020, but even more so. In the third year, we have some smaller funds, and this year, which represents that third year, is relatively limited. For instance, last year we included UKLV. These smaller funds will grow over time, leading to a more balanced promotion landscape. We have also modernized the terms of our funds, allowing investors to extend promotable periods into lean years, and new capital will have its promotion linked to the year it was introduced rather than a set year. Over time, you will see these promotions stabilize, though it will take a few years for them to achieve perfect smoothness. Therefore, I recommend looking at the promotions over a three-year cycle and averaging them. The guidance Tom provided for 2022 is actually a reasonable estimate for that average over the three-year span. Regarding the valuation of this, you are likely better at that than we are, but currently, we are not receiving anything for it, and we should. Historically, you can look back over ten years with the new Prologis over eleven years and estimate a percentage of AUM. I have typically considered 25 basis points in my mind of promotable AUM, with 60% of that contributing to our bottom line due to our participation programs. That’s how I assess it in a normalized year, but I believe it will be considerably higher during this cycle.

And you certainly seen our AUM grow and continue to grow. So, the underlying base at this point is growing rapidly as well.

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

Great. Thanks. Wanted to touch on acquisitions quickly. It looks like you guys came in like this quarter relative to guidance, and I know 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? And then any broader commentary regarding your level of interest, especially in large acquisitions in 2022 would be very helpful. Thanks.

Yeah. There was nothing in the quarterly results as indicative of more or less interest. And as you see quarter-to-quarter, these numbers move around quite a bit. We are always in the market. We look at all the deals, big small portfolios, et cetera. And prices have been moving up. Obviously, there are competitive situations, but I think we're disciplined like we always have been with acquisitions. But we got great teams and we're on every deal.

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

Yeah. Thanks. Can you provide some color on your underwritten development margins? It looks like the margins in the 4Q 2021 and 2021 starts is below in-place pipeline and the recent lease stabilized assets. There's something there that's driving those lower, or is it just conservative estimates?

Our margins at the start have traditionally been lower than the actual margins we see upon completion. We don't rely on factors like significant rent growth or cap rate compression that have occurred in recent times. Additionally, over the years, we've been utilizing our cheapest land and increasingly acquiring land at higher margins. The margins we've achieved in the last few years have been unprecedented. Over time, you can expect these margins to return to a more typical level as cap rate compression slows and rental growth inevitably decelerates; it can't continue to rise at 20% annually. This is not unusual at all. There’s nothing particularly noteworthy occurring beyond the mix of our developments, as we sometimes focus on different areas and our land bank varies in age across jurisdictions. While the mix does play a small role, the overall trend has been significantly higher than what we would expect through the cycle.

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

Yeah. Hi, everyone. Wanted to ask about just kind of labor in general, obviously from a broader economic standpoint, big issue for everyone. What are you hearing from your customers in terms of the rebuild of inventory may be related to labor, how long that might take and whether labor's getting better or worse for them and how that might be impacting any real estate decisions if at all?

Labor conditions have been deteriorating for a decade, and the pandemic has accelerated this decline. As a result, our customers are increasingly turning to automation to maintain productivity, which often requires significant capital that many of them lack. This presents a business opportunity for Prologis to invest in innovation, robotics, and other automated solutions to address labor challenges. Additionally, our CWI initiative is a significant step in this direction. I believe that as more technology is integrated into our buildings, tenant retention will improve, likely leading to longer lease terms and reduced turnover costs. While this bodes well for our long-term prospects, I don't foresee a resolution to the labor issue, which is particularly severe in the U.S. While similar challenges exist globally, the situation is especially critical here, and there are many theories about its causes, but I can't determine which are valid.

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

Thank you and good morning, everybody. Tom, going back to something you mentioned in your opening remark. You were talking about the $26 billion build-out potential in your land bank. And you mentioned that it's underpinned by an international opportunity. Set developments obviously jumped in 2021, but they seem to be weighted more towards the U.S. than they were in 2019 and 2020. Is the expectation that Europe could account for a larger percent of the 2022 starts, or is the opportunity set you were talking about kind of in other geographies?

Yeah. So, if you look at the composition of the land bank, our option land and covered land place, so this is almost 200 million square feet of build-out opportunity. It's about two-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, it'll be opportunity-driven.

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

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

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?

Yeah. On the cash in-place to mark today is right around 30%. And from an escalator standpoint, I think what we're seeing today with escalators would clearly be in the threes, and in certain markets it's in the fours and potentially even higher. So, I would tell you there, when we think about all these escalators are certainly important. But at the end of the day, our teams are trying to drive the highest cash flows at the Canada lease. Bumps are a part of that. Starting rents are a 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.

We are NPV investors on leasing. Our flexibility to accommodate the tenants' preferences enables us to achieve a higher NPV.

Your next question comes from line of Mike Mueller with JP Morgan. Your line is open.

Hi. Is there a significant difference today in the margins you're anticipating for build-to-suits compared to spec developments?

Mike, I'd say there's no greater difference than there always have been. And you underwrite these at 15 to 20 on spec and roughly 10% on build-to-suit, and those numbers move around a little bit based on risk. But if you're asking about the differentiation between the two, things really haven't changed. Obviously, the outcomes have changed because the margins are much, much higher.

Your next question is from Steve Sakwa with Evercore ISI. Your line is open.

Yeah. Thanks. I had just a question on development costs. What sort of inflation trends are you seeing kind of starting this year? How did that compare to 2021 and what sort of bottlenecks or issues are you seeing kind of in your own supply chain getting all the stuff you need to build everything you want to build this year?

Yeah, Steve. So in the U.S. in 2021, there were total shell construction cost increases of about 31%, and that's on a market-wide basis. We were able to mitigate about 7% of that increase or seven percentage points of the increase. So, our net increase that we absorbed last year was 24%. So, we feel like most of that is a competitive advantage against 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.

Let me connect that to some of the earlier questions. With the rise in replacement costs, and considering that land prices have been increasing even more rapidly, it’s beneficial to already own a billion square feet of this type of real estate. Especially since many others are entering the same market and lowering cap rates while replacement cost rents are increasing, we find ourselves in an advantageous position. This isn’t due to exceptional skill; it’s mainly just luck.

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

Hi, there. I guess just considering your expectations for 2022 and the guidance you've laid out, can you 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 commencements in the second half or pace of development stabilization, what sort of assumptions are you making? Is it that the strength of 2021 stays the same, improves further or slows, and kind of what's driving that?

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 together, we put away so many of our rollovers already in for 2022 that there isn't that much opportunity on the margin to put of effect 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 a future year type of thing again, they occur during the year. So, I would say our volatility in the short term, meaning this year is going to be relatively modest. And you can take that answer to the bank pretty much any year at this time.

And then I'd go back just to the in-place to market that $1.2 billion of NOI that we will capture with no market rent growth that gives you a high level of certainty regarding the same-store growth going forward. So, the things you need to think about is, if rent growth outperforms in 2022, that's going to take that $1.2 billion rep. 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 continue to be sector-leading for many years to come.

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

Hi, everyone. Thank you. Are rising rents and revenue growth still handling 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?

I'm not sure I understand 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 in 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 of fuel, cost of transportation, all of those things are much bigger factors in terms of our customer's cost structure. So, there is not as much sensitivity to the real estate cost. If there's a commensurate increase in productivity that comes along with that, I think that's what you asked, but we'll give you an opportunity to clarify here if that's not what you asked.

Thank you.

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

Good morning. This is Michael Bilerman. Hamid, I want to follow up on your previous answer regarding not predicting cap rate trends due to past inaccuracies. I'd like to explore the factors that contributed to those miscalculations over the past five years. While I understand that rent growth is not significant and that NOI is crucial, the cap rate does play a vital role in your capital allocation decisions, including purchases, sales, development, and capital raising on the balance sheet. What is your perspective on this moving forward? It seems you must have an opinion, so I would like to understand the elements that led to previous errors and how they might influence your future decisions.

We've put forth our best effort and we do have insights on these matters. After all, we've been providing guidance for 25 years, so we certainly have a perspective. Over the past decade, many of us in this room have reflected on how in the 80s and 90s, cap rates for logistics were around 9% to 10%. As we've seen those cap rates decline significantly over the last 20 years to around 3% to 4% today, we find ourselves somewhat anchored in that past, which can make the current market seem a bit expensive. However, several factors have changed. Interest rates in general have driven down returns across the capital markets, including stocks, bonds, and real estate. Additionally, there’s been a greater recognition of logistics real estate as a valuable asset class, leading to more pronounced compression of logistics cap rates compared to other property types that have not seen as much compression or have even gone in the opposite direction in recent years. I don't foresee anything hindering that trend. As for long-term interest rates and their direction, it's hard to predict. However, I can assure you that the influx of capital is increasing, not decreasing. If you're uncertain about the inflation outlook, which is a prevalent topic, whether it’s inflation-related or supply chain issues, owning modestly leveraged real estate in a balanced asset class—possibly even stronger than balanced, with a few hundred basis points above equilibrium due to rising replacement costs—could be beneficial. We have a substantial buffer from the mark-to-market aspect of about 30%, as Tom mentioned, coupled with rising replacement costs, as Gene pointed out. These factors provide a future buffer we have yet to fully discuss. I have traditionally been conservative in our rental projections, though I've tended to remain more optimistic than some of my colleagues, who might project lower than actual outcomes. I expect this trend to continue, but I would consider it unwise to forecast another decade of extraordinary rental growth after the remarkable increases we've seen this year. Therefore, we manage our business with a more cautious approach that aligns closely with long-term trends. If conditions prove to be better than anticipated, we will communicate that to you quarterly. Regarding your question, let me wrap up with this thought. It’s crucial to accurately assess cap rates and rental growth over the long term, and we can compete effectively in those areas. However, our company is increasingly evolving into a diversified cash flow-generating enterprise. Tom highlighted that we have a billion dollars coming from our private capital division, mostly without additional capital, since our capital comes from co-investments tied to the real estate sector. While we might overlook it, our Essentials business generates about $75 million a year, which has the potential to grow into a billion-dollar business, alongside our EV business. I’m not making definitive claims about timelines, but we are gradually establishing these cash flows on top of our core real estate operations, as there will eventually be a slowdown in real estate. The opportunity to collaborate with customers using our properties represents significant potential for us in the long run, which is an exciting aspect of our current position. Thank you for your interest in our company. And we look forward to talking to you soon.

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