Prologis Inc (PLD) — Q3 2021 Earnings Call Transcript

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 a 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 will hear from Tom Olinger, our CFO, who will cover 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 Karsten Kallevig. 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 continued 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 continued to broaden across a range of industries, with this segment representing one 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. forecasts 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, preleasing in the U.S. delivery pipeline has reached 70%, its highest level ever as customers continued to compete for space. Acute scarcity in our global markets is driving record rent 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% in the U.S. and 17% globally, both up approximately 700 basis points. Our in-place to market rent spreads 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 24%. 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 queues for 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 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 ranged 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 per share to $4.13 per share. Core FFO, excluding promotes, will range between $4.06 per share 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 below 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 will range from warehouse space to transport infrastructure to labor scarcity. In closing, I want to highlight two important upcoming Prologis events. First, this Monday, we will be hosting a webinar that we will dive into our development and strategic capital businesses. And second, on October 27th, we’re bringing together supply chain and community thought leaders to focus on some of the most pressing issues in logistics today, including workforce, energy, and transportation. Please visit our website for more information and the registration links for both events. And with that, I will turn it back to Sarah for your questions.

Hi, everyone. Good morning. 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 Gene. We really never provide guidance at least voluntarily on deployment, because as I’ve said many times, it can range between zero 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 with the right opportunities came about. But there is no urgency around investing in a particular timeframe.

Hey, everyone. Good morning. 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 two points with customers looking for space that maybe they can’t fill right away or are they just expecting their supply pipeline to rebound quickly, or are they moving stuff from other warehouses or sort of, I guess, it’s a little bit counterintuitive for somebody be taking more space when product is sort of an issue right now? Sorry for long question. Thank you.

Yeah. 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 is 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 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 one-time event or a sustainable event? And I would say, this particular factor is likely to be temporary. Although, probably two-year or three-year type of process before everything straightens out. But right behind that are the two big structural drivers that on top of normal absorption. They include increased share of e-commerce and inventory levels being higher than prior to the pandemic and those two things people aren’t even thinking about right now, because they’re struggling to keep their heads above water. So I think the 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 their long-term drivers.

Great. Excellent. Thank you so much, guys. Quick question on cap rates. We’ve seen incredible compression this year, and unlike prior years, it’s really seemed to be across the board. Does that create any risk in certain markets or regions where fundamentals of demand may not meet the lofty valuation expectations we now have?

Boy, that’s a tough question to answer. I will give you mine and Gene, I am sure will have ideas about this. First of all, we’re notoriously bad at predicting cap rates. We’ve been saying for about five years that they’re too low, only to watch them go lower. But remember, cap rates are a function of two things. One is general returns available in other capital markets, namely interest rates or risk-free rates. And more recently, this rent growth and the growing power of that initial yield is orders of magnitude higher than it’s ever been. So I am 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 six months than it does with the 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?

Yeah. 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 will see how it plays out. But I don’t really think, of course, you may have a different point of view that those spreads have actually tightened that much further.

Thank you. 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 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?

Yeah.

Supply risk is very specific to the market. While there may be a desire to increase supply in places like Los Angeles, San Francisco, Seattle, or the Inland Empire, there is a significant challenge in finding available land, and the process of obtaining entitlements is becoming increasingly difficult. Even markets like Dallas, which we previously considered to have fewer land constraints, are facing more limitations now. The main issue is the scarcity of land for new construction. Supply is reacting to the demand, but I feel that if supply were greater, demand would also be higher. There’s a lot of competition among customers for available spaces, and we frequently receive calls from our clients eager to gain an advantage over others. People are becoming quite anxious when it comes to purchasing or committing to real estate, leading to exceptionally high demand.

So, Jamie, I will 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 we really change our protocols in that sense.

Thank you. Hi, everyone. In January, on 4Q ‘20’s earning call, your in-place to market rent registered at 12.8% and with that in-place to market now at 22% just nine months, 10 months later. What are the key drivers for this change and really how sustainable is this mark-to-market across the portfolio?

Yeah. I will take that. So I will 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 a very minimal role in the fourth quarter and given our market rent growth expectations. So I would expect that 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 a 3.5% to 4.5%. Now here we are today at 22% and when you think about that increase that really takes a 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 two 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.

The only addition I would make to Tom’s comment is that land prices in most markets are increasing faster than rents, and construction costs are also rising quicker than rents. Therefore, the rent needed for the marginal square foot of supply exceeds 22%. This explains why there's an upward trend; we are progressing but somewhat stagnating or even slightly regressing in terms of keeping up with replacement costs.

Thanks and good morning out there. So I want to talk about your development pipeline. It’s obviously grown very nicely to a $5 billion. Can you remind us for the hard costs, 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 impacts that has to your future development in terms of margins or yields?

So, Ki Bin, we believe we've managed to contain about 25% of the cost increases we've experienced so far. In our upcoming projects, there’s approximately 4% that goes beyond the initial project assessments. Most of that should be accounted for through contingency plans. Looking ahead, we don’t foresee significant risks. While I won't go into the specifics of our pre-purchasing strategies for steel and other materials, I think we've mitigated a lot of the challenges to this point. We observe that the markets are beginning to stabilize. Additionally, we've successfully maintained our schedules and currently have gained an extra 30 days compared to the market. In fact, we've been able to construct these buildings more quickly than the market standard, which adds that extra 30 days. Supply chain disruptions affect not just costs but also timelines. Ultimately, you’re asking how much we’ve successfully mitigated. I’ve shared what we’ve accomplished thus far, and we’re likely about six months ahead of the curve, although we can’t go much further than that. I feel very positive about what we’ve achieved this year and believe we are well-prepared moving forward. We are optimistic about the outlook, and we are indeed raising our guidance and expectations for our volumes.

Yeah. I think more importantly than hedging construction costs is the fact that rents are going up faster than some of these costs and 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 far so good. Will it continue forever? Probably not.

Hey. Congrats on the quarter. Just a quick one on just retention shooting up 650 basis points year-over-year, any color what drove that kind of specific geographic, just curious there? Thanks.

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 quarter-to-quarter.

Good morning. I was wondering if you can comment on how you see occupancy trending with your leased now at 90%, 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?

Our occupancies have to go higher. I mean if your demand is 385 and supply is 285 million, there is 100 million feet that’s going to come out of somewhere and added to that the obsolescence, the significant amount of product that’s taken out of circulation, because people have built something else on it like apartments. I think for sure our 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 two unique drivers that we’re seeing in this cycle that we didn’t have in other cycles.

John, regarding your question on Asia driven by China, we have observed some very good lease activity in China. Japan continues to have extremely high occupancy rates.

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

Hey, guys. 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, do you guys try 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?

There are several reasons for this, but we are actively implementing escalators everywhere. More importantly, the markets are accepting this, and the competitive landscape is adapting, possibly to mitigate the impact on customers, although many of our customers already receive straight-line rent. Overall, we believe this reflects our positive outlook on net effective rent growth, and we feel optimistic about it.

Yeah. Thanks. Most of my questions have been asked. But I just on the development increase. I am 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, how do you sort of see that trending moving forward?

Yeah. So, Steve, I will take the first part of it. So we 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 increases build-to-suit activity. And maybe, Mike, can you comment on that?

Yeah. Steve, so in the sub, 60% of our activity was build-to-suit. That will normalize at the end of the year in the mid-40s. But I’d remind you, that’s going to be at a much larger base, which is representative of two 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, the dearth of available space out there has put us in a really good spot on overseas.

Hey, guys. 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?

Yeah. Certainly, there are delays in some of our essential projects as well, forklifts, racking, those sorts of things. So OEM manufacturers in 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 chat on that?

Yeah. Clearly, labor is on the minds of lots of our customers and we’re seeing them getting creative on how they’re attracting labor and you see the commercials for a lot of companies on TV and what they’re doing there. It’s also having them focus 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.

Yeah. Hi. Tom, you previously talked about base case annual promote levels. How does that change for where cap rates have moved to today?

Yeah. As a reminder, we talked about, call it, seven cents 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 will talk more about it in January, but directionally that’s what you should expect.

Yeah. 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.

Hi. Good morning. A question about the building acquisition guidance that, the increase there talked about covered land space 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 the 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 am not sure it’s that constructive to talk about the cap rates, but it is competitive. I think we have a strategic advantage in the markets we want to be in, because we’ve been doing this now for three years or four 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 yield on our covered land place, the entire portfolio cover land place, which is about a quarter of our total land base is about 5%, which means that we’re actually getting better yields on some of these covered land place and that some of it is 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 cover the land place and options, and really the own land that’s just sitting around there that’s the most expensive way of carrying land. So we’ve been on to this 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 months 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.

Yeah. Just to add onto 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 three components of it and after you pay taxes, you’re still on the plus. So we’re kind of carrying this for free. And frankly, some of those income profiles on the early covered land places have a serious upward arrow to them. So, another way to think about land exposure.

Yeah. Thanks. So could we see leasing activity or demand improved as the 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 three to five 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 start thinking about the long-term and people are some of the larger and 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 three months or four months. So I think that crazy crunch will diminish over the next two years to three years, for sure. But I think then they will turn to the longer-term strategies and I think that one has legs for a long time.

Yeah. 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. It’s kind of in the last four 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?

Businesses need to identify where their customers and networks are situated. Real estate and associated costs account for only 3% to 5% of the overall expenses, and this percentage hasn’t increased despite rising rents, as labor, transportation, and energy costs are also climbing. Therefore, companies won’t focus on minimizing real estate expenses; instead, they will prioritize the locations of their consumers and the efficiency of reaching them, which is largely about time rather than tasks. Consequently, they will need to concentrate on larger markets. It wouldn’t make sense to set up in a remote area just because real estate costs are lower; they need to serve the thriving markets where growth is occurring.

Thanks. I just wanted to follow up on the leasing market and in particularly the 3PL market, which has been incredibly active year-to-date. Could you just talk a little bit more about the trends you’re seeing there? I imagine we’ve heard 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? Thanks.

Yeah. This is Mike. And 3PL activity was up 500 bps last quarter and we’ve seen this really play out over the last several years where 3PLs might have viewed space as a bit of a commodity many years ago. Today our view in is as an offensive weapon to help accommodate their customers and we’re seeing this play out in the form of them leasing more space and they have underlying customers lined up, 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 certainly securing space in advance of acquiring customers, and they are indeed filling those spaces. This is not like the late 1990s when businesses were just hoping for rapid growth. The reality is that the market is struggling to keep pace. That’s the main point here, regardless of how you ask it. The supply market is unable to meet the existing demand.

Great. Thanks. I wanted to touch on acquisitions in general, not just specifically on the covered land plays as you touched on those earlier. You guys were able to do just under $400 million of 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?

The 5% is primarily a result of the mix. Our acquisition strategies are not focused on purchasing core portfolios at the highest bids; instead, we are continuously searching for off-market deals. These off-market opportunities do tend to provide better returns, and the 5% reflects this mix issue. Regarding our confidence in the future, as Hamid mentioned earlier, we had a quarter with $330 million in transactions, and future quarters could vary significantly—from $2 billion to possibly nothing. It really depends on the opportunities available to us. We are confident about the next quarter since we have several projects in progress. However, predicting long-term confidence is challenging. If returns exceed replacement costs significantly, our activity level may decrease. Conversely, if a strategic opportunity arises, we might see a quarter that far surpasses our current performance. Acquisitions are inherently difficult to predict, and they should be.

Yeah. If somebody gives you a precise forecast for acquisitions you should run for the hills. But there’s also another two I think important differences between us and others. First of all, our playing is the globe. And that’s lots of different ways to deploy capital than just in the U.S. Now I am not saying by the way Europe is any easier, but I am just saying we have really multiple ways of deploying capital. And secondly, a lot of the incremental capital that’s come into 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 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 players in the, I buy office buildings and malls today and now I am going to buy warehouse, because it’s cool. So that’s the difference.

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

I have been hearing optimistic expectations from people in various regions of the country for about 20 years, and every time you invest based on that expectation, you miss out financially. I don't believe that's changing. Yes, Elon Musk is relocating from California to Texas, and he gets a lot of media attention. However, his consumption patterns aren't significantly different from those who earn $60,000 a year. The main consumption hubs are in these established markets, which are densely developed. The proximity to a beach is not particularly relevant; what matters is that these populations continue to grow. While there was a slowdown last year, growth is still ongoing, with most movement happening within similar areas, such as from the urban core to the suburbs. There's substantial data on this. Chris, perhaps you would like to add more. Regarding the distribution business, we do not have separate facilities to service the urban core versus the suburbs; they are all located within the same driving region.

Yeah. 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 am specifically talking about the USPS data, you’ve seen migratory trends dissipate, that is slow down. So, it is not continuing, it is not accelerating. And if you look at other real-time data, for example, the housing, you also see the same trends. So just a couple of data points to reinforce the points Hamid is making.

It's important to note that California and New York do have their share of issues, and these need to be addressed. They must become more business-friendly and focus on improving the quality of life, as homelessness is a significant concern among other challenges. However, ultimately, individuals tend to migrate toward areas with job growth, which is currently happening in those regions.

Thanks, everyone. Chris, one for you, in the past, you’ve talked about how much logistics is as a percentage of sort of overall whether the 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, does that relationship get messed up either with rents becoming a bigger piece or the other costs becoming a bigger piece? Thanks.

Hey, Manny. Yeah. It’s our assessment that right now that ratio has not changed and so for those who are not familiar with the data by rent is roughly 5% of supply chain costs and supply chain costs roughly 5% of revenue. So rent is about 25 basis points of throughput distribution. With the growth that we’ve seen in transportation costs, growth we’ve seen in labor, that has in fact been excess of the market rent growth and so that ratio has not meaningfully changed. If anything, it’s gone down a bit.

Thanks. 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 rental 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 you 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?

I don’t believe that we ever reach a point where the math dictates our decisions. The reasons for being involved in the private capital sector extend beyond just achieving scale. They include mitigating currency exposure and leveraging our return on capital, among others. We have a strong history and a respected brand in that space, and it remains a crucial part of our strategy. We will continue to engage in this area meaningfully. However, the focus for our growth is not on external growth. While we have engaged in more external growth than anyone else, our primary focus is on internal growth. This internal growth arises from careful portfolio construction over the years, and it will ultimately drive our earnings and create value for the company. The deployment of capital is beneficial, as it helps us achieve scale which lowers our general and administrative costs and enhances our liquidity, thereby reducing our cost of capital. However, what truly matters is how we select locations for our investments. For example, in our recent M&A transactions, we have sold about 30% to 35% of the assets because we don’t see potential in those markets. We retained the assets that we believe in. Although it might have seemed like the right short-term decision to keep those assets, given the decreasing cap rates, in the long run, we believe that focusing on the right portfolio will serve us better. Therefore, while external growth is beneficial, internal growth is the foundation.

Thank you. It looks like you’re going to see some meaningful rent growth in Europe. Can you talk about how your ability to push rents there compares to what you’re seeing in the U.S. and if there’s certain markets that are doing better than others?

The U.K. tends to perform better than other markets in the U.K., while the continental markets are somewhat comparable to the average U.S. markets, albeit at a slightly lower level. When considering rental growth, the average in Europe is likely below that of the U.S. currently. However, the cost of capital in the U.K. and Europe is more favorable due to lower interest rates compared to the U.S. All of this aligns with the context of capital costs. The U.K. resembles the coastal U.S. more, while continental Europe is more akin to the rest of the U.S. Okay. Jamie, I think you’re the wrap. So I really appreciate everybody being on the call. I think we had about 780 of you on the call today, which 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.