Prologis, Inc.

Thanks, Brent, and good morning, everyone. Welcome to our first quarter 2022 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 filing. Additionally, our first quarter earnings 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. I'd like to welcome Tim Arndt, our new CFO, who will cover results, real-time market conditions, and guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Kurlis, Dan Letter, Ed Neckeritz, Tom Olinger, Gene Riley, and Colleen McEwen are also here with us today. And with that, I'll hand the call over to Tim.

Thanks, Tracy. Good morning, everybody, and thank you for joining our call. The strong performance we realized through 2021 has continued into the new year. Today, as the production and distribution of goods continue to be disrupted, our customers find themselves struggling to simply keep up rather than focus on optimizing for resilience. This morning, we released our first quarter results, which exceeded our expectations across the board. Core FFO was $1.09 per share ahead of our forecast. Rent change on rollover was 37% on a net effective basis and was led by the U.S. at 42%. Notably, our Southern California and New York, New Jersey portfolios realized 86% and 67% rent change during the quarter, respectively. We ended the quarter at 97.4% occupancy, holding average occupancy flat to the fourth quarter of 21, counter to the typical first quarter decline. These operating results drove cash same-store NOI growth to a record 8.7%. As we've been highlighting, The positive news in market rent is adding to our lease mark to market now at 47%. This equates to $1.6 billion of annual NOI as leases roll to market or over $2 per share of earnings that will drop to the bottom line even with no additional rent growth. Given our market rent forecast and expected rent change, the lease mark to market could exceed 50% by year end. We started over $1 billion in new development during the quarter across 32 projects in 16 markets, which are expected to generate over $400 million in value creation. The build-out potential of our land bank now stands at $28 billion, or approximately 200 million square feet. Most importantly, the balance sheet remains in excellent shape. Our debt-to-market cap is very low at 14%. We have nearly $7 billion of liquidity and over $18 billion of investment capacity across Prologis and our open-ended funds. Turning to our markets, vacancy is at all-time lows in most of our geographies. During the quarter, we signed 60 million square feet of leases and issued proposals on 90 million square feet as customers continue to compete for the little space that remains. Supply chains have yet to return to normal as measured by in-stock rates, shipment lead times, and active dialogue with our customers. While the flow of goods has improved, the inventory to sales ratio remains more than 10% below pre-pandemic levels. Inventories need to not only make up for this 10%, but build an incremental 10% in safety stock. And even if retail sales decline 5% as consumers shift their spending to experiences versus goods, we project that the market will still require an incremental 800 million square feet of space in the US alone. As for supply, We are reducing our deliveries forecast for the year to 375 million square feet as developers struggle to deliver on time due to the lack of materials and labor, a condition we expect to continue throughout the year. Because the supply story can become nuanced, we believe the best way to understand it is by comparing current vacancy in the market, including the development pipeline, to trailing net absorption. We are calling this true months of supply or TMS. Historically, in our 30 U.S. markets, the average number of true months to absorb this view of vacancy has been 36 during expansionary periods. Today, that figure is 16 months, less than half. By contrast, we analyze supply in the next 20 non-prologist markets and see approximately 30 true months of supply. Our research team will be releasing a paper further detailing this unique perspective next month. This leads us to vacancy, where we forecast rates to remain at record lows in our US and global markets, upholding the strong environment for continued rent growth. During the quarter, market rents in the US grew by 8.5% and 6.5% globally. Given this pace and our outlook on demand, we're revising our annual rent growth forecast to 22% in the US and 20% globally in line with 2021. This rent growth was the main driver of value increases during the quarter, which measured 9.5% globally. The uplift in Europe was a record 6.3% with strong appreciation across all markets, while the U.S. increased 10.3% during the quarter following the significant 42% increase in 2021. Still, while logistics markets remain strong, there are a number of macro headlines that we're monitoring. We are closely watching the events in Ukraine and the impact it's having on our colleagues and operations. So far, we haven't seen any impact on our business. And as we've highlighted in the past, these disruptive events often have the effect of increasing demand for warehouse space. Prologis and our employees have been contributing to refugee assistance efforts, including providing space to local nonprofits under our Space for Good program and staying close to our colleagues personally affected by the conflict. We are also watching both interest rates and inflation. On interest rates, we've been well ahead of refinancing this for some time. addressing substantially all of our debt maturities through 2026 and taking advantage of low interest rates. Today, our weighted average interest rate is 1.7%, which has an average of 10 years remaining. And as far as inflation, we operate over 1 billion square feet of real estate where we find replacement costs rising at multiples of inflation. While rents have been increasing from secular tailwinds for some time, inflation will create a pricing umbrella for even further rent growth. Taking these macro conditions and our strong first quarter performance into consideration, we have raised our 22 guidance as follows. We are increasing the low end of our average occupancy forecast to a new range of 96 and three quarters to 97 and a half percent. We expect rent change on rollover to increase throughout the year, driving net effective same store growth to a range between six and one quarter and 7% and cash same store growth to a range between seven and a quarter and 8%. Given the increase in asset values in Europe and our PELF venture, we are increasing our net promote guidance to $460 million, most of which is occurring in the third quarter. And we are also increasing strategic capital revenues excluding promotes to a range of $550 to $565 million. Combined, our strategic capital business will generate over $1 billion in revenue this year. We are maintaining our guidance range for acquisitions of $700 million to $1.2 billion, as well as our development starts range of $4.5 to $5 billion. While we often increase or narrow deployment guidance as the quarters progress, and notwithstanding the strong demand we see across our markets, we've elected to maintain our starts guidance, recognizing certain factors that are outside of our control, such as labor availability. We are increasing our disposition guidance by $400 million, reflective of both values and the strong selling environment. We expect to generate $1.7 billion of retained cash flow after dividends, an impressive amount given the 25% dividend increase we announced during the quarter. Overall, we've increased the midpoint of our core FFO guidance by $0.08 to a range of $510 to $516 per share. Core FFO excluding promotes. will range from 450 to 456 per share, representing 11% growth from 2021 at the midpoint and driven by our same store increase. Over the last few quarters in outreach we've had with analysts and investors, we've reiterated what we hope is a clear picture of our differentiators. It starts with a customer first mindset, a unique approach in the sector, and we found great opportunity in our scale and are only beginning to realize its potential. For example, our procurement capabilities continue to be a significant advantage as we've secured both materials and pricing of various components, extending deeper into the products needed to fully stabilize our projects. We estimate that our procurement efforts have allowed us to deliver projects four to eight weeks ahead of our competition and at 7% to 8% lower costs. In our essentials business, we're working to provide end-to-end solutions for our customers beyond the real estate. which is providing new sources of revenue. This includes energy solutions, where we are leading the way with solar, storage, and EV charging. And notably, we crossed 300 megawatts of power production this quarter, and we'll add another 20% by year end, dramatically accelerating our pace. Additionally, we're innovating with workforce solutions to serve our communities and tackle the acute shortage of labor through our community workforce initiative. This program has trained over 13,000 workers to date across 15 markets. These efforts are a logical progression of our ESG leadership and are integrated with our premier global portfolio, industry-leading cost structure, strong balance sheet, and strategic capital platform. We continue to believe our best days lie ahead and look forward to reporting out on our progress. With that, I'd like to pass the call back to the operator for your questions.

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from Jamie Feldman with Bank of America. Your line is open.

Thank you and good morning. Hamid, I'd like to get your thoughts on where you think cap rates and asset values are headed given the move higher in financing costs we've seen this year. I'm also hoping you can discuss Pete Prologis' appetite for acquisitions with $18 billion of investment capacity and your positive fundamental outlook. I'm not sure how much you can comment on the mileway bid that's been in the press, but any color you can provide on that transaction, what you would or would not like in that portfolio, or even the final pricing on that transaction would be really helpful. Thank you.

That was pretty good, Jamie. You got three questions into one. First on your question, I think cap rates are a little tricky. I actually think cap rates are going to hold because the mark-to-markets are so large. So every quarter that goes by, even if the underlying cap rates of leases at market were to go up, the actual cap rate is unlikely to go up because there's so much mark-to-market that increases from quarter to quarter. I don't know if your question literally meant cap rates or cap rates for deals at market. If it was the latter, I would think that they would go up a bit, but that's certainly not the major vector driving those cap rates. Our general appetite for acquisitions is always the same. We reluctantly provide guidance on acquisitions. You've heard me say that before. that our acquisition guidance in any given year can be zero to $10 billion, and we've exceeded it on both ends in the past. So I wouldn't read too much about our acquisition guidance because we don't have a budget to which we acquire. However, and this sort of goes to your question on mile weight, which I can't really answer directly, but I think it will give you our philosophy. We do not comment on market rumors. But we look at every single deal of any significance that happens in any of our markets. You would expect us to. And usually the three criteria that we look at are, number one, fit with the portfolio in terms of quality and location. The second would be valuation and economics and returns and things of that nature. And third, we look at a process and determine whether it's a process we can be successful in or not. And that's how we analyze and prioritize our time. We did not talk to any reporters in connection with the mile away transaction. We never do. But you never know who talks to reporters and for what reason. So let's just leave it at that.

Hello? Operator?

Your next question comes from the line of Michael Goldsmith with UBS. Your line is open.

Good morning. Good afternoon. Thanks a lot for taking my question. Rents continue to grow. Lease mark to market reach 47%. Net effective rents are up 37%. You took your numbers up for what you expect rents to grow this year. Industrial warehouse rents, at least historically, have been known be lower than other asset types. So my question is, is there a limit to how high industrial rents can grow? And if so, what are they? And if not, what's going to cause a slowdown in this? Because it seems like the growth that we're experiencing is sort of unprecedented and at a previously imaginable.

Yeah, so let me take a stab at that. Yes, there is a limit to how far industrial rents will grow. There's a limit as to how far the prices of anything can grow. But if you look at the factors that are contributing to this tremendous growth in industrial rents, there are many, including supply and demand to start with, which you're dealing with a market that's 3.5% vacant. And as you heard in the prepared remarks, we're running at a fraction of the normal months of supply that's out there. So notwithstanding all this noise around supply, the relevant supply in the markets that we care about are extremely tight. But there are markets where, you know, they've already hit that threshold of rent increase and rent increase is flat. And we don't, I can't think of any of those in our portfolio, but I'm sure there are markets like that. So the other factor that's contributing to this rental growth is the escalating construction costs and land costs, land costs even more than construction costs. And that has to do with, you know, anti-growth sentiments and limitations on allocation of zone land to industrial, et cetera, et cetera. The third factor I would think about as being important is just the contribution of rents to overall supply chain costs. And you've heard us talk about this before as rents account for about, occupancy costs actually more than rents, account for about 3% to 5% of supply chain costs. So frankly, the ability of our customers to pay rent is a lot more determined by labor costs and transportation costs than real estate costs. So yeah, there will be a point of saturation, but I think it would be a mistake. And by the way, I use these words cautiously. very cautiously because I know that you can get in trouble by not being cautious here. But I really do think this time is different than the last 20 or 30 years for a variety of reasons that I've described and a few more that if we have some time, I'll get into. By the way, I apologize about this sequencing of the MC for this show. I don't know what's causing it, but we have very limited control over it.

Your next question comes from one of Ki Bim Kin from Truist. Your line is open.

Thanks, Don. Good morning out there. So a few weeks ago, Freightways, a company I know you guys know well, put out an interesting article talking about the downturn in the trucking sector, which might be a possible bearish harbinger. I was just wondering if you can provide some high-level commentary on what you're seeing in terms of trucking volumes and what that might mean for a possible consumer slowdown and how that might impact your business.

Yeah, let me pitch that over to Chris.

Yeah. Hey, Keeban. So for starters, we've seen the pricing in the trucking space decline, as I think you have as well. First and foremost, I take a look at capacity in that space. It's really supply-driven that's leading to repricing. And a lot of the metrics that track demand in the trucking business have proved resiliency here through March and April. And when you look at our own leading indicators for demand to better understand if there is any kind of read-through, for example, the Prologis IBI or the proprietary leading indicators of our business, we do not see the slowdown.

By the way, the volume and the pricing should be differentiated too. The pricing was just ridiculously high in the last year or two, and it's just coming back to earth. By historical standards, pricing is still very strong, and volumes, as Chris described, haven't been affected adversely. By the way, they will be. I should say this. I think trucking volumes will decline because if fewer containers are coming out of China, Because Shanghai is shut down, there are going to be fewer containers that are going to be redistributed, and that will affect trucking volumes. But it's not because of lack of demand from the ultimate consumer. It's because of lack of supply by the producers. And I think that's a problem that people will start talking about next quarter in a big way.

Next question comes from the line of Steve Sacqua with Evercore ISI. Your line is open.

Yeah, thanks. Good morning. I was just wondering if you could provide a little more color on the same store NOI trend. You did 8.7 in the quarter. Obviously, you've raised guidance for the year, but it does imply a fairly sharp slowdown in the balance of the year. I know the comps get tougher if you kind of look at your progression through 21. But could you maybe just comment, you know, kind of where you settled out given the mark-to-market comments? And I realize occupancy might be slipping a bit, but just help us kind of frame the NOI increase with the mark-to-market and the kind of sequential slowdown we're likely to see moving forward.

Yes, Steve, this is Tim. Look, you've kind of answered your own question there. It is on the occupancy front. And I wouldn't I'd hate to characterize it as a slowdown because what's accelerating is rent change. If I go on a net effective basis, we have 37% in the quarter, and that's going to go up into the 40s over the balance of the year. That's the more enduring part of our overall rent growth, so that's what we're focused on. And, yeah, we had a large occupancy build over the quarters last year, and we're going to keep it stable this year, so it's principally coming from rent change.

Your next question comes from Caitlin Burrows with Goldman Sachs.

Your line is open.

Hi, good morning, good afternoon, everyone. Tim, earlier you touched on the benefits of your size, including the essentials business. I was wondering if you could give an update on the business, maybe how much it's contributing to FFO today, where you see that going over the near to medium term, and whether it's just being included inside of the rental revenue and expense line items, and if that could change at some point.

Yeah, I'll start and pitch a little over to Gary here. With regard to this year, we have 9, 10 cents of contribution to FFO from all of those businesses. And with regard to geography, that would be our plan and hope that they're of sizes that they need to be broken out at this point. Most of it is flowing through rental revenues, as you suggest. But over time, that will expand as the businesses grow.

And just let me add, so you mentioned last quarter that we had 225 million dollars in procurement savings. That capability has now been embedded in the business. So we're not going to talk about those savings anymore. You're just going to see them flow through operating and development margins. When you look at the essentials business that Tim just described, we've talked about that business as a 75 million dollar a year business with the potential to go to a billion dollars. Our near term goal for essentials is to double next year and to double again by year in 2025. And I just say that that growth is very much dependent on how successful we are at launching and growing new products and services. So let me give you a couple of examples. In our energy essentials line, our solar product is scaling and our storage and EV products are still in their infancy. In our operating essentials, our forklift and racking products are beginning to scale and our smart building products are in their infancy. Again, all of these offerings are at different points in their life cycle and are growing at different rates of speed. But as Tim said, this year, eight to nine cents in our share earnings. And as we mentioned at our investor day back in 2019, we'd expected essentials to contribute about 50 basis per annual growth. This year, it'll be about 75 to 100 basis points.

Yeah, if I can add something to that, just to put some numbers around what Gary talked about. It's $75 million this year. We think it's going to be double that next year. As you said, double that by 2025, so you can do the math. We're kind of honing in on $300, $350 million by 2025. That's what we're driving towards. But let's not forget another important line item, which, of course, we've had for many, many years. But it's a real differentiator, and I just don't want people to think of essentials as the only differentiator. That's our private capital business. And you heard that $500 to $600 million of fee revenues and, you know, about that much of remotes. We're kind of circling a billion dollars of bottom line contribution by that business that, you know, not a lot of people pay attention to. It's not in our market cap. But I would suggest that a billion dollars is probably a pretty significant standalone P&L for a REIT these days. So there are lots of additional things that we're adding that are very profitable businesses that don't actually use up a lot of capital, but leverage off of customer relationships and the stickiness of those relationships through long-term leases.

Your next question comes from the line of Mandy Corkman with Citigroup. Your line is open.

Hey, everyone. I mean, you mentioned Europe in a couple of different ways in this call. One was that values keep increasing. The other is there's some, you know, obviously volatility and uncertainty there. So help us connect those two things and maybe give us an update on what you think about the markets you have exposure to in Europe longer term.

Sure. Actually, I think those two things, volatility, uncertainty, and rents going up, are really part of the same equation. When things are running smoothly, people can optimize supply chains and minimize inventories, and that's what they've done for many, many years. Whenever you have a disruption, like we had Brexit, or we had the pandemic, or we had the earthquake here and there, and now the war, you know, it's a very unfortunate situation generally. And I feel for our people in Europe and I feel actually for people around the world with this atrocities going on there. But the reality of it is that the impact on our business is actually positive because of the disruption that it causes. People just need to carry more safety socks. Demand in Europe has been surprisingly strong. I shouldn't say surprisingly, it's been really strong. And interestingly, Europeans have been more timid in terms of pushing grants than than we are here in america but finally they're realizing that they uh that they have more pricing power than they thought and uh and taking uh taking the rents to a higher level so um i i feel pretty good about actually the rental picture i don't feel about good about what's going on in europe in in the ukraine but i feel good about our business there in terms of the immediate impact of the war, obviously Poland is a country that we're pretty active in that's right next door. And a lot of our people are hosting families that have come into Poland, you know, almost 3 million people. And I mean, we have employees that are housing dozens of these refugees. And so obviously it affects how they feel about their life and concerns they have about a lot of families from Ukraine. Actually, a lot of families from Russia also that work in Europe. And by the way, those people are just as distressed. Just because they were born in Russia doesn't mean that they like what's going on with the war. So there's a lot of emotional angst in Europe. It's all understandable. But the business is pretty good. And I don't see it getting derailed. Unless, you know, this war goes to a whole other scale. of things that I don't even want to imagine and then everything is toast. And our business is the last thing we should worry about.

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

Great, thanks. Good morning. Can you talk about your clear lease program a little bit and remind us what percentage of your tenants are leasing with the clear lease structure which expense items are kind of fixed in that structure and whether you've seen any deterioration to margins given the inflationary environment and increasing costs.

Yeah. So this is Gene. So about 70% of new leases are clear lease currently in the system. I think it's probably around 30 or 35%, 35% installed. Um, And in terms of, you know, where are we on the spectrum of being a little bit ahead or a little bit behind on expense reimbursements, we've been ahead of the game really since the beginning. And recently now we're a little bit behind. But this is going to happen. You know, over time we think we'll be right on the pins. I think to date we're right on the pins, by the way. And this is a – This is a value add for our customers, and we're not doing this to make money. We're doing this to be on the pins and provide an option that others don't.

Yeah, the other thing that is important to note is that we're getting escalations on the clear lease rent, which is a gross rent, and those escalations are moving up from 3% to 4% in some markets to 5%, and that will during the duration of the lease will cover any short-term issues. But you're talking about literally $1 or $2 million of spread one way or another across a $400 million sort of expense category. So it's a very small deviation. And we get to recalibrate it every time we sign a lease. So it's not like it's an endemic kind of an issue.

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

Thanks. Just a question on the development pipeline. I know you give the yields on stabilization versus the starts. If we're to factor in the 20% rent growth that you're talking about, expecting globally this year, does that mean that your starts – your yields on your starts are really going to be over 6% versus the 5-6 that you gave for the starts in the quarter. Just not sure how we should also factor in rising construction costs, maybe offsetting the yield a bit.

They do. That's exactly the way you should think about it. And it's not just construction costs, but land costs don't immediately affect the margin because obviously land is at historical value, but on the new land, land is even increasing more than construction. So that is, You know, our margins, we always perform around 15-ish percent. And we've been for the last, as far as I remember, come in at 20 to 40 percent. So clearly, rental growth has outpaced construction and land costs growth. But I think that outperformance will narrow in the near term. And may widen again, but I think it will narrow. So I think we're going to hold margins We're not going to necessarily increase them.

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

Thanks. Just a quick follow-up on the same store and why guidance. Just any incremental color on the 113 basis points. Can you break that down between occupancy, rents, and anything else? Thanks.

Yeah, you can roll forward our occupancy guidance and see there's a small, just using the midpoint, small component out of occupancy. And it's principally going to be rent change, really the step up in market rents we saw in the first quarter, going through to the balance of the year together with the rest of our forecasted increase. And that's driving the majority of it.

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

Yeah, hi. Tim, can you talk about how much your spot global debt costs have changed versus where they were at year end?

Yeah, thanks for that question. We're certainly proud of where the debt stack sits. As a reminder, we're 1.7% today. I would say on dollars, we'd put that out at 3.25% to 4% would be the dollar rate. In euros, we'd be in the low twos. In yen, we'd be in the low ones. And I think if you're putting that all together, And this information is in the back of the set, but 60, 70 percent of our debt is going to be in euros. That's how you ought to think about reassembling the stack with a large chunk in yen. And then it's actually the dollar component that's the smallest. So that's what lies ahead. We have very few maturities coming up through 26, as we've mentioned. So we feel really well insulated in this rising rate environment.

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

Hi, everybody. Thank you. Just a quick one on the dual demand drivers. Clearly, e-commerce is intact. But has the supply chain bottlenecks impacted the increased inventory build mandate that you were seeing from customers? I guess, is leasing demand for space to house elevated inventory levels still intact? I mean, companies struggle to procure parts and materials for finished goods. Do you see a possible pause here until bottlenecks ease?

I don't think so, because what's going on is that people are running to catch up just with the demand that they're seeing from their end customers, and they're not getting there. They're always behind. So the first stage is for them to catch up with what they need to have to get even with pre-pandemic kind of levels of service. And then they need to think about their long-term strategies. And for sure, as we've talked about many times, resilience is going to factor into those calculations a lot more than it did before. So that's why we think about this as a 10% catch-up and a 10% resilience cushion for a total of 20%. But we're also, and Tim alluded to this in his prepared remarks, we think there may be about as much of a 5% temporary decline to netting out the 10 plus 10 minus 5 to 15. And the negative 5, you may ask, well, why do you think that there may be a negative 5%? Because at some point, things will really open up and people will get tired of sitting at home and ordering online. So I expect the percentage of online sales to temporarily decrease. step back a bit before it gets back on a growth curve of ever-increasing penetration levels. And I also believe that the expenditures are going to shift more to experiences than goods like they have been in the last two, three years. So between those two factors, I don't know if it's going to be 5%, but in our thinking we're kind of putting in a factor of 5% for that just to be safe. But still, a 15% swing in inventories up is like 800 million square feet of additional industrial demand on top of the normal demand that we see just based on population and economic growth. So I think there's a lot of cushion there for demand long term.

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

Good morning out there, everybody. Tim, I wanted to follow up on your mark-to-market comments. Obviously, one of the more important numbers I think you gave on the call this time around and your guidance about over 50 by the end of the year possibly. Can you give a little more color on kind of the buildup of that? I realize there's a lot of numbers in there, but thinking – geographically or length of lease duration? Since you're rolling about 25% of your leases in practice by the end of each year, how do we kind of build up to this number that then continues to grow and exceed your spreads?

Sure. The number, and again, this is in the sub, you can look at how our expirations roll. We're rolling more like 14% to 16% of our leases every year. So you can take that through the level of rent change that we've had, and I've explained it's going to grow from here, that's going to get you into, actually, if you compute that, you're going to find same-store growth rates that are sevens, eights, and nines actually going forward. And this year we have, on a net effective basis, same-store growth projected around 6%, 7%. As long as we have a market rent growth forecast that's higher than that, which it's dramatically higher than that this year, that's going to drive the expansion. And we could see, I mean, we're not forecasting market rent growth in 23. We'll see where that plays out, but it's going to take a long time to wean that number down.

Yeah. And just to tie that to earnings, because that's what we care about same store. Look, we've been pretty open about what we think, you know, in terms of a longer term earnings growth picture. And all of this is without promotes, which are volatile. But You know, in the last time we all got together in person and we provided the forecast for you, we kind of sat in high single digits, low double digits, high single digits, actually. And we ended up being about 150 basis points above that annually for three years. I think if we redid those numbers, we would be in the low to maybe mid teens, not 15, but maybe 12, 13 percent kind of. three-year earnings growth picture given these mark-to-markets that are extreme. So I feel really good about the cushion, and I feel more better about the longevity of it even than the absolute level of it because with 45%, 50% mark-to-markets, I mean, that will carry you for a long, long time. So I think we have very resilient earnings, and most of that gas is in the tank. Whatever gas we put in the tank because of further market rent growth from here, that's just gravy.

Your next question comes from the line of Craig Millman with KeyBank Capital Markets. Your line is open.

Hey there. This is already on for Craig. Just a quick follow-up on Jamie's question earlier, but how do you guys anticipate cap rates to change across markets? the quality, geography, and maybe portfolio size spectrum in the current environment? And maybe how big do you guys see that magnitude or that spread getting?

Well, I think the markets that have had the biggest mark to markets will have the strongest cap rates because basically you're buying a below market income stream. So just look around for the markets that have experienced the biggest rent growth in the last three or four years. And those are the cap rates that are going up remain the strongest absent any capital market considerations. And then you've got to look at your expected growth in the future. And, you know, the markets that have grown strongly in the past are pretty much the markets that are going to grow strongly in the future. So I think it's pretty easy to hone down on those markets. There are some markets, as I suggested earlier, that really the only thing they've got going for them is the higher replacement costs. There's not a scarcity of land. And even if demand at elevated levels is not going to normally result in significant rent increases, I'm talking about markets where we either have no or very little exposure to the less constrained markets, the Columbuses of the world, for example. So you've got to go market by market, but I think the places that have the strongest growth will have the strongest cap rates and growth goals.

Your next question comes from the line of Andrew Rozek with Wolf Research. Your line is open.

Hi, everyone. Thanks for taking my call. I wanted to follow up on the clear leases. And by the way, thanks for that great video that you have on your website. It makes a lot of sense with your business model that, you know, given the skill you have that you can pass on savings to the tenants, you still pass through utilities, you still pass through real estate taxes. What percentage is kind of tied to a gross lease?

It's CAM, which is less than a third of the overall expenses. But it's not the level of expenses that drives the popularity of ClearLease. It's the fact that you spend all your time reconciling a very small number, and that's the biggest source of friction with the customers. So really, it's to simplify their life. It's not... Look, neither they or us are that smart to figure out exactly what expenses are going to be. We're probably a little smarter because we've got a billion square feet to experiment around. But at the end of the day, it's just like Gene said. It's about simplifying their lives and taking away that point of friction away from the dialogue so that we can turn to more important things like selling them forklifts.

So just to hit on some of the other things, today most of the customers... They just pay a utility bill. But in the future, we may actually be selling them energy. And that may become part of the clear lease. And real estate taxes are just too volatile for us to take on that risk. But at some point in the future, maybe there's a way to insure around that risk. And if there's a viable way to do it, we will do that. So 10 years from now, who knows what the clear lease looks like. But it all comes back to the same thing. ease of doing business so we can spend our time with these guys talking about important things like essentials versus reconciling expenses your next question comes from the line of john kim with bmo capital markets your line is open good morning um europe including the uk represents 11 of your noi but now 58 of your debt by currency

and that spread has widened. So whether it's Model Y or another acquisition, how important is it to increase your NOI in Europe to further borrow in local currency without taking on too much FX risk?

Yeah, so I would completely think about that in exactly the opposite way. We first start with how big we need to be in each market to serve our customers and what the opportunity set is in each market. By doing that, we end up in some markets outside the United States, i.e. UK. And we are a U.S. dollar dividend payer. So we don't want to be obligated to pay a significant stream of dollar dividends and have our revenues and bottom line be in a currency that may not be perfectly correlated with the dollar. So we need to hedge somehow. We cannot hedge economically for very long term based on just buying hedges. So we want to set up natural hedges. And there are two ways we set up natural hedges. One is that we borrow in local currency, so the assets and the liabilities move up and down as the currency fluctuates. And the other thing is that we deploy more private capital in those jurisdictions to really bring down the prologis share in those foreign locations with different currencies. So we don't... drive our real estate strategy to lower our financing costs, we have a real estate strategy and then we design a funding strategy around it that will insulate us from unusual risk.

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

Hi, good morning. What exactly changed over the past three months to cause your U.S. market rent growth forecast to increase to 22% up from 11% last quarter? And could you also bifurcate the current rent growth forecast between coastal and non-coastal markets?

The latter, Chris, we'll do shortly. But look, as somebody asked earlier, we are in unprecedented territory. I mean, industrial rents historically, well, some people actually used to say industrial rents are never going to go up, but industrial rents do go up, but they've never grown at these levels, but we've never had market conditions like we have now. We've never had e-commerce at this level of importance. We've never had resilience becoming such a big factor. We haven't had these bottlenecks in the supply chain that clog up the network. So all of these And we haven't had inflation and shortage of materials and labor and all that in terms of bringing on additional supply. So all of these factors, you know, none of them are new, but the extent of them, if you're off on each one of them by a little bit, they accumulate to, you know, being off 10% in a quarter. And we do our best, but we're not always right. And in this case, we were low.

Hey, it's Chris. I'll jump in with a couple of details. First, as to what's changed in the last 90 days, I'll point you to a couple things. The first is rent growth accelerated and outperformed expectations on an actual basis in the first quarter. The second is we've revised up our replacement cost growth. We haven't talked about it on the call, but there's been meaningful move in replacement costs. We could see them up 15%, 20% this year in the United States and more, for example, in Europe. Property fundamentals are stronger than expected. Tim talked about a reduction in the supply forecast. And then Hamid's earlier remarks on the ongoing dislocations in supply chains I think will keep urgency flowing through decision making. As it relates to regional differences, the U.S. for sure is outperforming, and it has been led by the global markets on the coast, and it's practically all of them. So you can look at New Jersey, Pennsylvania, Baltimore, even down to South Florida, which we haven't talked about on the call in a while. And then in California, it's not just Southern California. Northern California is also contributing. The split between the coasts and the non-coasts is roughly going to be 25%, 26% on the coasts for this year versus, say, something more like 15% in the interior markets. And the last point I'd offer is it's not just a U.S. phenomenon. There's clear growth globally. It's both nominal and inflation-adjusted. Europe generally, but especially the U.K. and Northern Europe, There are several Mexican markets that are enjoying meaningful repricing, and it also offered Toronto and Canada.

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

Hi, good morning. I think you mentioned that you kept your development start guidance the same despite the strong demand environment. How much of that was due to, I guess, more opposition from communities in certain areas, and how do you navigate that issue going forward as you seek to develop further

Yeah, well, that is a headline for sure in the future, but it did not factor into maintaining the guidance. Basically, maintaining the guidance, and of course, at this time of the year, we're typically going to narrow the range and increase the midpoint. And as Tim mentioned, that's really conservatism based on issues we see in the supply chain. They're driven by labor. They are more prevalent in Europe, as you can imagine, right now than the U.S. I feel great about the pipeline. And if I were betting right now, I think we will increase that guidance as we go throughout the year. But at this point in time, with what's going on in the world, we just think it's prudent. But it is not related specifically to entitlements now. But that is for sure a headwind in the future.

Your next question comes from the line of Manny Corkman with Citigroup. Your line is open.

Hey, it's Michael Billingman here with Manny. Hamid, you've done, and the rest of the management team as well, sort of outlining all the drivers of industrial demand, and you've made it clear sort of the attributes that makes ProLogis different and unique, whether it's your investment management program, the development, the e-commerce, and essential business that you're building, focus on ESG, the billion square feet under management. And so you can control what you can control, which is all the elements of growing your business. What you can't control is the macro environment. And I recognize there's a war in Eastern Europe. So if we put that aside for one second, there's a lot of building concerns around recession fears and whether it's a yield curve, We've talked a lot about inflation. You've talked a little bit about the movement of services from goods. I guess how do you sort of think about recession, which obviously you can't control, but what are you seeing? And is it different from what the macro talking heads are interpreting about some of that data? And is there anything that you're doing in addition to protect the firm from that?

Those are really good questions, actually. So we think a lot about recession. We've thought about 20 of the last three recessions often, and we're conservative by nature, and we're always, when things are going well, we get worried and sort of keep thinking about what we may be missing. So we're not Pollyannish about recession or anything like that. But, you know, look, we're not smart enough. We just look at what our customers tell us and what they do and the actions and the words that they use. And I would say the posture of our customers is very much front foot forward because they're benefiting from certain secular trends that are in their favor. Could those reverse? Does it take a long time for the CEO thinking that he's going to tighten his belt or her belt and The guy who's buying real estate in the field, acting on that, there may be a lag. But boy, our customers are very active, particularly on the e-comm side. I mean, the demand from e-comm tenants has really, really broadened. I mean, there was a time that, for example, Amazon accounted for a pretty significant part of this demand. And a lot of questions we would get is, how broad is it? Well, it's a lot broader than it used to be. Very, very broad. we see our customers with their front foot forward and taking up more space. And that gives us comfort that we're not facing a recessionary environment, at least not as it pertains to our business. Now, again, fuel costs are up. That's taking a big bite out of the consumer's pocket. There's a war going on. We're going to have midterm elections now soon. I mean, there are all kinds of imponderables, but But so far, it hasn't translated into conservative behavior by our customers. And on the supply side, these constraints, I know people don't really believe this because they all throw out the 400 million square foot supply number and all that. But I don't know where that is. In the markets that we really care about, that's a day-to-day battle that we fight. And it's very, very difficult. And the only thing that gives me comfort is at least we have our billion square feet. And, you know, we do care about growth. But, look, if they shut down the whole thing, our billion square feet is going to be worth a lot more. So, again, not Pollyannish. We're definitely focused on it, but we're not seeing the signs. And what we've done about it is pretty simple. We have reduced our leverage to a level that we can be on offense. if something bad were to happen. And this is very different than both companies were in 2008, 2010 timeframe. Not that I'm predicting anything like that, but I'm just saying we built it to last. And I think downturns could actually be a source of opportunity for us.

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

Yeah, thanks. I just wanted to drill down, Hamid, in an earlier statement that you said that a tenant supply chain cost reflects 3% to 5% of their total cost structure. I know that's a number you guys talked about for a while and kind of highlighted that they're willing to pay two times the real estate cost if they can reduce their transportation and labor by 10%. I guess my question is, have you or do you expect to see that 3% to 5% number increase as these tenants continue to invest in their supply chains and rents continue to increase at a fairly quick pace?

I expect rents to increase at a fairly quick pace, but I don't expect that percentage to go up because I think labor and energy will go up faster than rents. Energy is more than doubled. in a very short period of time. How long that lasts, I don't know. If energy prices come back down to oil being 60, 70 bucks a barrel, maybe at that time the percentage of rent and occupancy costs will step up a little bit. The other thing on the horizon that's going to increase the percentage of occupancy costs is automation. I think over time people are going to invest more and more in fixed automation in their buildings. And you can count it any way you want. It can be labor because automation is really a substitute for labor, or you can call it occupancy cost because it's bolted onto the floor of the real estate. But that will definitely be a new cost category that will increase over time. So net-net, I don't think that 3% to 5% is going to change all that much. That was the last question in the queue. And before you guys sign off, I really want you to say for this part. I just want to say a few words about our partner and CFO, Tom Hollinger, and his substantial contributions to the company over the last 15 years. Actually, it's a lot longer than 15 years because Tom was part of the team that actually took us public when he was a young partner at Arthur Andersen. So he's been with the company for a long time and has added a lot of value. And you know that his last day officially was April 1st, and Tim is now our CFO. And that really points to Tom's impact on this company. He has been a leader on our executive team and a fixture on earnings, probably more interaction with you guys than anybody else in our company. You know, in April of 2007, when he joined the then AMB, the company was 150 million square feet and a different set of capabilities. And now here we are, much larger, more significant company. I think today we're number 66 or 67 in the S&P 500. All of that has been accomplished under Tom's tenure. And I can't speak enough about his integrity, about how much he cares about our investors, our analysts, and how much he's been a voice of reason and a model for the kind of values that we like to see around here. He's obviously built an industry-leading financial infrastructure and a team that positions us well for continued success. I think the transition to Tim has been textbook example of good succession planning on his part. And, you know, the good news about all of this is that Tom is going to end up doing what he's wanted to do, which is to spend his time on his family and his philanthropy, which are important to him. And I'm glad that his hard work here and the success of the company has positioned them to be able to do that. And I But he's not going away. He has been nice enough to tell me and his other colleagues that he's going to be around whenever we need him. And I believe that. But I hope that we won't avail ourselves of that generosity of time too many times. So I just want all of you to wish Tom a really great farewell in addition to the team here at ProLegis.

Thanks, Amit. I'm like a bad penny, I guess, showing up here and there. But I just want to say how proud I am to be part of this company. And as Amit mentioned, I've prospered and evolved over my time here. And while we've accomplished much, as Tim said, the best years are clearly ahead for the company. And we spent a lot of time today talking about the things that make Prologis unique. The differentiators, at the heart of those differentiators is the amazing group of people that work here. And that starts at the top. I want to first thank Hamid for the opportunity to be part of this team. In my 35 years of work experience, I've never worked for or with a better partner. I want to thank my EC executive committee and finance teammates for their friendship and support. I'm really proud of Tim, and he's going to be an incredible CFO. I want to thank the investors and analysts, as Amit said, for your time and interest over the years. I'm looking forward to seeing you all at NARIC one more time. And the bottom line is I've been blessed to be part of this company. After I leave later this year, this team will continue to play a very important part of my life in my next phase. And for that, I'm very grateful.

So thank you all. Thank you, Tom.

Thank you for all of you for participating in this call, and we look forward to seeing you next quarter, if not sooner. Take care.

This concludes today's conference call. You may now disconnect.