Prologis, Inc. (PLD) Earnings Call Transcript & Summary

Good morning, good afternoon, and thank you for tuning in to our webinar. Given the strength of the positive structural trends in our business and recent transactions, we've been fielding many questions on valuations, particularly as it relates to our development and strategic capital businesses. We've studied analogs and tapped into our industry experts. The net of our work is that a reset in valuation is warranted. Our 3 speakers will take a deep dive into the unique aspects of Prologis. Chris Caton will start with our investment strategy and show the merits of our strategy are clearly demonstrated by our performance. He'll translate this to a discussion on how to continue to build upon the success in our development activities. Gary Anderson will then take you through our strategic capital platform, explain its history and how it's not just synergistic but central to our overall business model. Tim Arndt will close out the discussion by tying it all together and walk you through how we and the industry experts think about valuation. At the end of the presentation, there will be a Q&A session. And of course, I have to draw your attention to the forward-looking statements included in the presentation that will be posted to the IR section of prologis.com at the end of today's session. And with that, it's my pleasure to turn the floor over to Chris.

Thanks, Tracy. Hi, everyone. I have 3 goals for my talk today. First, I'm going to define great real estate and logistics real estate; second, show you how that's mapped to outperformance for Prologis in our operations; and third, show you how that's map to considerable performance in our development business. So what's great real estate? Look, I think we all have a shared understanding of what a great office tower, apartment building or shopping center looks like, but it's less clear for logistics real estate. The place I want to start actually is a misnomer that building age is predictive of performance in our business. I want to introduce some new data to you, and we're going to think a little bit about same-store and look at it on names. So the data that you see populating here are the more than 5,000 leases that we've signed over the last 5 years in the U.S. It's plotted age of the building against rent change on rollover. And I like that metric because it gives us great same-store properties. What you can tell by the cloud of dots is there is no correlation in performance. And if we look at the weighted average rent change on roll by decade, as you see by these yellow dots, in fact, you can see there's a slight negative correlation. For example, 2000 vintage properties have a 14 percentage point lower rent change on roll compared to 1970s vintage properties. So indeed, age is not predictive of performance. Now I recognize CapEx loads are higher for older properties. But in our experience, rent growth has been more important and overwhelm the higher CapEx flows. And recall, right, we have a strategic capital business where we mark-to-market our properties on a quarterly basis. So we have a total return concept. And what we see, net of this CapEx is total returns are better for older vintage properties than newer vintage properties. So indeed, this isn't a misnomer, range is not predictive of total returns. So that still leaves us with a question, what's great real estate? And what I want to do is, in fact, take you on the buyer journey, right, a customer who's leasing from us. What steps are they taking to secure real estate? I think that's illustrative of what's great real estate. And the place we're going to go is the place we all know is markets first, right, market selection matters. So we're going to do is we're going to take that same data, the rent change on rollover data and reorganize it and group it by market. Prologis is in 28 markets in the United States. You see them all represented here. The simple average rent change is 25%, but you can see the dispersion in performance here, right? On the far left-hand side, you see markets that have 50% and more rent change on rollover. And on the right-hand side, you see assets that have mid-teens and lower rent change on rollover. Now Prologis has long known the importance of market selection, right? Our weighted average rent change over the last 5 years has been 30%, meaningfully outperforming a simple average. And it comes from having some good market selection, right? So those markets on the left-hand side, the top 5 markets have rent change of 45%. And indeed, it's 45% of our U.S. our share NOI. And those markets, the bottom 5, those that have 12% rent change represent less than 10% of our U.S. our share NOI. So market selection is indeed important for outperforming, but that's an oversimplification. Our industry has reached a new level of sophistication and nuance that to simply leave the conversation at market is insufficient. We need to take it down another level to submarkets. And what you see there is material outperformance. So what I've done is regroup that rent change on rollover data again into 2 submarket categories: infill and peripheral locations. We're really looking at 10 global markets in the United States here and what I've done is create a matchpair concept, take that infill summary. So for example, that might be in San Francisco, the East Bay, California or in Chicago O'Hare and then compare it against a similar pair in the peripheral locations. So that would be Central Valley in California as in the Bay Area concept or as in Central [ DuPage ] and other further outlying locations in Chicago. So there's 14 percentage point difference you just jump off the page. I think a great question is why is there this difference? Two reasons. The first relates to a change in the price elasticity of demand. Customers have an urgency and they're prioritizing infill locations to fill their customers' needs. The second is the simple scale of our business and the scarcity of land. Buildings are built farther from city than ever before. If you take the New York, New Jersey, Pennsylvania area, supply in past cycles were 27, 28 miles from Manhattan. In the current cycle, they're 50 miles away. So I hope you see is location is critical to performance, not just market, but you really got to zero in on submarket. Now let's take this to the third step in the buyer journey, true focus on building feature selection. In general, customers are really prioritizing location. They're willing to accommodate what's available on the market. An example will help here. We look at a submarket with modern requirements, modern features. Let's take Central Pennsylvania, right? These customers are focused on maximizing the cube as well as throughput distribution. So you're going to have them emphasize 32 to 40 for clear, they're going to want modern door-to-floor ratios as well as high trailer parking rates. If we go to a more infill submarket like Meadowlands, what you're going to find is these customers are there because of the rooftops, New York and New Jersey. Now they do have clear high requirements, but it tends to be in the 18 to 20-foot range, so half the modern requirement. And there's just less emphasis on the door-to-floor ratio and trailer parking. So what does this mean for Prologis? Well, look, we have a rigor around looking at all of our properties and asking ourselves, does this property drive premium rents? Will it grow over time? Will it stay leased in recessions? And I'll remind you that we've sold 18 -- more than $18 billion of real estate over the last decade. That's 1,841 times that we've looked at a property and said, no, we don't want to hold that property through the next recession. No, we don't think it has the ability to outperform. So then it should come as no surprise that the Prologis portfolio does outperform both globally, nationally and in their individual markets. So we put this all together, whether it's the 5,000 leases I showed you earlier, the near 2 billion square feet of leasing we've done over the past few decades, Prologis has the compounded learnings to hone a strategy and cultivate a portfolio over time. So that takes me to our outperformance. Let's look at that actual data. What you see here on the page, if you look on the right-hand side is same-store NOI growth. We're looking at it for the last 5 years and a couple of concepts. You've got Prologis. You've got the other industrial national companies, and you've got the other property types. And we're looking at things on both a net effective basis and on a cash basis. So we've sustained same-store NOI growth over the last 5 years at 4.1% on a net effective basis and 5% on a cash basis. It's incredible. Equal to that is the relative outperformance. 100 basis points against the other national industrial companies and 400 to 500 basis points against the other property types. I recognize this is all retrospective. Growth has reaccelerated in the last year. And as we shared last week, we have a 21% in place to market, which means we have visible and strong growth for years to come. So I hope you've heard from me today is to find excellent real estate, importance of market selection, submarket and micro location selection, having the appropriate features in the buildings and having a disciplined disposition program. That's led us to outperform on the operations side, but we also fold these learnings into the development business. And I'd like to share some of that information with you now. We are the world's leading developer of logistics real estate. I'm sharing with you our development track record and it's, I think, really impressive. As you can see running down the left-hand side, we've built 461 million square feet over the last 2 decades, $8.9 billion in value creation at a near 25% margin and 21% IRRs. Now this approach is the summary is blessed by a third party. But what I'm really sharing with you is the summary of our own internal studies where we put as much work into learning on the back end as we do at the outset of projects. And these results come from our discipline, our experience, our procurement capabilities and our scale. Prologis has more than 300 investment professionals globally to say nothing but further 500 professionals that operate our real estate. Suffice it to say that we see every transaction. We also have customer-led solutions and customer-led development. These teams cement our relationship with the world's leading customers and they help us stay ahead of what's next, so that we can both shape and derisk opportunities. International is a really important part of this story. It's 70% of our value creation occurs outside the United States. Globally, in any given year, we'll build in 60 markets. That offers us both diversification benefits and also to be selective in the opportunities we pursue. Our businesses in Asia, in Europe and in Latin America, the portfolios are market leading, and we have recognized market leaders. Another part of the story is a variety of strategies that we employ, whether it's covered land plays, raw land, Urban Last Touch or other approaches, we seize these riskier opportunities given our experience and our capabilities. They generate our top quartile and top decile performance. We also fold in modern features into all the buildings we've built because we hold these assets for decades. So as you can see, we're the world's leading developer of logistics real estate, an incredible track record. What I'm equally excited about is the future, and I want to talk to you about our land bank. So this page describes our land bank by geography and by type. Our land portfolio amounts more than 9,000 acres and equates to more than $21 billion in total expected investment. That's important because it's a visible form of growth for our company. And you can see the map here. It shows both the importance of international to our business as well as our overweight positions to the markets that matter most. The numbers and bubbles represent our total expected investment by market. Now this portfolio has been cultivated over years, not recent months, and we will not raise to bring product out of ground. Now as it relates to types, you can see optioned land covered in the table below. They allow us to minimize our upfront investment and effectively control the pipeline for future growth. Covered land plays detailed in the middle are complex projects, they allow us to earn a current income while we explore upside opportunities. This has been an area of focus for us. They've comprised 30% of our acquisition this year, and the total expected investment has risen by $3 billion. These have been projects that are focused on infill locations and routinely comprise the top quartile and top decile of our returns. So in summary, we have a variety of differentiated strategies to fuel our growth going forward. As I close out my section today, I have a couple of points. I really hope you've heard about our differentiated strategy as it relates to real estate made possible by our scale, our experience and our market presence. You've seen the results from an operating perspective, but it also fuels our development results. You've seen the development track record. We have this land bank that gives us a clear runway for growth. And taken together, it's a unique and valuable franchise. Thank you for your time and attention. I'd like to now turn it over to Gary Anderson, our COO.

All right. Thank you, Chris, and good morning, everyone. I'm Gary Anderson, Chief Operating Officer for Prologis. I want to spend a few minutes talking about our strategic capital business and sharing some of my thoughts. I want to talk about how that business has evolved over time, how it has become integral to our core business and how this model drives value for Prologis beyond what you might see from a typical asset manager. So first of all, let me start by saying that Prologis has been in this business for a long time. As a company, almost 40 years, myself almost 30 years. Over that period of time, we've tried to evolve the strategic capital business to match the evolution of the core business. And at the same time, we have tried to optimize the strategic capital business. So if you look back 30 years ago, we were a U.S.-only company. Today, we're a global enterprise operating in 19 countries. One of the things that we realized is we can leverage the strategic capital business to manage currency risk as we've expanded internationally. Today, despite the fact that we've got this opportunity to invest all over the world, we've kept our net equity exposure at 95% USD, tremendously important as a U.S. REIT paying U.S. dollar dividends. So again, effectively, we've got this wonderful opportunity to invest all over the world, but we've effectively eliminated currency risk through the use of the strategic capital business. The other big advantage, I would say, is that, as we all know, the real estate business is capital intensive. And yet Prologis hasn't raised public equity in years, reason being, again, we're leveraging the strategic capital business to our advantage. You'll see a deck later on. And I think in the appendix, there'll be a slide that speaks to how we contribute assets to our vehicles and how we effectively round-trip those -- that capital. But the net of it is that we basically build assets, development assets on our balance sheet. We ultimately contribute them into our funds at a profit. We basically leave that profit behind as our equity investment in those funds, and we derive a return off of that equity investment. And then we take the remaining capital and redeploy it in developments again. So again, I think that's one of the levers that we pull in order to generate free cash flow. This year, we're going to generate $1.4 billion in free cash flow. We're going to end up with a dividend payout ratio in the low 60% range. Those are both exceptional when you look amongst our REIT peers. Over the last decade, we've also tripled AUM in this business. We're up to $87 billion today. And at the same time, we've taken the number of ventures that we operate from 21 down to 10. Today, 94% of our income in our strategic capital business comes from these perpetual long-life vehicles. And I don't think a lot of our investors and even some analysts really understand the value of that. If you look at a traditional asset or investment manager, 20% to 30% of their income would come from these perpetual life vehicles and something like 70%, 80% would come from the closed-end vehicles. So they find themselves in kind of the situation where they're always raising capital. They're trying to replenish or replace that income stream that they lose on a regular basis when they wind up those funds. We certainly don't have that situation, again, with 94% of the income coming from these perpetual life vehicles. So again, hugely valuable, tremendously consistent income stream and durable revenue. The other thing that we've done over the course of the last decade, I'd say, is we've really worked hard to diversify our investor base. And we certainly work with the world's largest, most sophisticated investors, sovereign wealth funds, pensions, insurance companies. But we've also been diversifying toward smaller investors. Each and every quarter, in fact, this year, every quarter that we've raised capital, about 50% of that capital has come from new investors, smaller investors. At the same time, as we've been adding new and smaller investors to the mix, we still concentrated and have had the beautiful benefit of maintaining a relationship with these investors for the long term. On average, our investors remain invested with us for 11 years. That is tremendously sticky capital and a tremendous benefit for us. So the question becomes, why does an investor stick with Prologis for 11 years? Why do we have a $3.4 billion equity queue today. And the simple answer is that we outperform. If you look at our U.S. funds, they're outperforming by 125 basis points to benchmark over the last 5 years. In Europe, it's about 71 basis points to benchmark. So again, tremendous outperformance. How do we outperform? It all starts with some of the things that Chris was talking about earlier. We have been disproportionately allocating our capital to the consumption and the supply chain to the markets that matter, the submarkets that matter, the micro markets that matter. And at the same time, we've been allocating capital to the building characteristics that matter. And we do that through our development platform. Our fund business has access to our development platform, as I've said before. And we're consistently trying to raise the bar on the building characteristics that we deploy in our new developments and actually our redevelopments as well. It's not just about clear heights and column spacing and truck courts. Today, it's about sustainability. It's about energy, it's about solar, EV, backup systems. And those are things that you can deploy not only in the development business easily, our new buildings, but our existing platform. And those are things that our customers will pay a premium for over the long term. There are at least 2 other ways that Prologis outperforms. First, we've got a cost of capital advantage. And second, we've got a scale advantage. On the latter, we leverage that scale in a number of ways. One, we see every deal. If you're a broker, you're not going to -- you're going to bring that deal to Prologis. So we see every deal. Secondly, we leveraged the scale and the data that comes from our 1 billion square foot platform to our advantage. We look at all of our operating data from our 1 billion square foot portfolio. And we think about how these buildings perform in each and every market across the globe. It helps us. We underwrite that next incremental asset. You see here on the slide the third-party AUM is growing at a 20% CAGR, third-party revenue at that same 20% CAGR. But third-party fee-related earnings, FRE, which is a typical metric for asset and investment managers is growing at about 26%. As a benefit of our scale. Again, we're growing fees faster than we're growing expenses. And it's driving margins to over 80%. Again, that would be a top-tier margin number for an investment management business. The last thing I'd like to touch on is promote income. This is a very meaningful opportunity for Prologis. Now there is some variability year-to-year in terms of the magnitude of promote income. But given our outperformance, our historical outperformance promotes actually do happen quite regularly here at Prologis. And historically, we've averaged about 17.5 basis points per dollar invested of third-party AUM. So those are meaningful opportunities for us. So to wrap up, I'd say there's 3 things that I'd like you to know. First, we've got a long history in the strategic capital business, and that has become integral to our core business; second, the earnings that come from this business are highly durable and highly profitable; and third, we expect this business to continue to scale and to drive further profitability. And to that end, we've recently announced the hiring of Karsten Kallevig. I don't know if all of you know him, but you might. He's done some great work at Norges. Prior to joining us, he built their real estate investment management business basically from 0 to $30 billion. And we're thrilled to have him join the Prologis team. So with that, I would like to conclude, and I'd like to turn it over to Tim Arndt to talk about valuations.

Thanks, Gary. Good morning and good afternoon to everybody on the call. So now that we've taken you through some of the differentiating strategies that define Prologis, our real estate portfolio, our approach to development and our strategic capital business, we wanted to spend the remainder of our time on valuation. And as Tracy mentioned earlier in her remarks, the structural changes and drivers in our sector, together with recent comps that we've seen in very similar businesses have driven us to want to take a fresh look at valuation sort of reset, especially of these more unique aspects of Prologis. So we've been doing that over the last few months. We've actually enlisted the help of some third-party advisers on the topic. And we want to take you through what we think reveals a sizable gap in valuation and NAV, particularly in these unique areas. So as we have this conversation, we're going to talk about the valuation of a business. And everybody here knows we need really 3 different things to do that well. One is we're going to want to establish what the cash flows of that business are; secondly, we're going to want to think about how those cash flows will change and grow over time; and thirdly, we're going to want to pick a discount rate or a required rate of return and have that covered by how we think about the business, its risk profile, its management, its track record, et cetera. So that's where we'll begin. We'll start with the development program first. And what I want to start by taking us through is just what are the attributes that are going to help us define what is a high-quality development business. We'll just step through them here on this slide. The first one I'll mention is just what is the business model itself aside from our development activities because you already know we're the largest and leading logistics developer but it's the other elements that surround the business that make it truly accretive. One, you heard about on the front end, which is our customer-facing organization. Chris took us through that, and that leads not only to important advantages in leasing of speculative developments, but it's the build-to-suit driver that's really important to us as evidenced by the 165 build-to-suits we've delivered in just the last 5 years. And we haven't talked a lot about this today, but we have a procurement organization that's really key to getting us materials on time and ahead of budget, frankly, for carrying out the construction activities themselves. And on the back end is what Gary took us through on strategic capital and strategic capital is important, not just as a source of capital building out some of this platform. More importantly, it's the flexibility it provides on the back end. So you know that we build in most of the world, these assets on our own balance sheet and strategic capital gives us an additional monetization option on the back end. Most developers are left with just an option of selling buildings like a homebuilder may have. In some cases, they can realize value creation through the lease stream over the life of the asset. We have a third option, which we think is optimal, which is our contribution model where we retain control of the asset, we recycle the capital, we generate a fee stream. So all of these pieces together fit together synergistically, they help drive scale, they drive value, they optimize returns. They ensure flexibility on exit and they really create a very durable approach to development. The next thing we want to think about is scale and diversification. As the largest developer, clearly, just on a perspective of dollars and also project count, we're very well diversified in that regard. But I would ask you to think about it in the context of our balance sheet as well because at least today, we're not the largest developer in relation to our balance sheet, which I think adds another layer of diversification. So many of you are going to think about diversification, which can be thought of in terms of markets, customers, products, capital sourcing, and we certainly have that, but when you put all that over the size -- the sheer size of our balance sheet, it's even more impactful. We should also think about growth when we're thinking about the success of this business. Historically, we have now had 15% growth in our development starts over the last 10 years. We've done that while remaining selective on products and markets that we develop in. But growth is also probably more important on the go forward. And here, we can think about the $21 billion of TEI that we have in our land bank today provides very tangible, visible growth through at least the next 5 to 6 years, I would say. And this is the best located land bank that we've ever had, frankly, and some of the premiums we see in its own valuation are the highest that we've ever seen, and Chris touched on that earlier. We want to look at track record. You've heard all about our track record many times, including earlier today with Chris, so I don't want to dwell on it more here. But I would encourage you to just note how open and transparent we are in the track record since we first put it up 8 years ago, we put it in front of you frequently. We continue to have it blessed by Duff & Phelps when we do so. And I think not just the numbers, but our willingness to put the numbers out so frequently, really speaks for itself with regard to track record. And lastly, what is the breadth of opportunity from here? And it's very broad, I'm sure, as you can appreciate, given the 60 markets that we develop in, we're across 19 countries. Many of these regions of the world have different secular drivers at different points in time. Some of it is e-commerce related, some of it is supply chain reconfiguration related. But I would also think about this breadth of opportunity with regard to product type even. You know that we are the more inventive, I would say, of the logistics REITs with all the vertical development we've carried out, bringing that to the U.S. in the last few years, covered land plays, infill redevelopment. We cover a lot of diverse opportunity sets in that way as well. So with all of that established, I think we can move on to the next page here, where we're going to step through an illustrative discounted cash flow model of this business. And the first thing that you see up on the screen is just a series of development starts over the next 10 years. That's the horizon we're electing to look at here. And actually, if you see the first 5 years that I've circled, this equates to about $18.3 billion, that happens to be our share of that $21 billion of TEI that we mentioned earlier. We're going to look at all of these numbers on an our share basis since we're talking about Prologis' equity value at the end of the day. And I would point out a couple of things. This is starting at $3.6 billion of starts. That's the midpoint of our new guidance at our share. And these start volumes are growing at 5% per year. So think about that in the context of 2 things. One is the 15% historical growth rate we've had. So 5% sounds conservative there. But also think about it just from a cost perspective, what the cost of this product is these days as you think about material cost changes, labor and even land costs. It's very easy to wrap your head around a 5% growth in the start volumes. Now I'm adding here margins and the resulting value creation. The margins you see in the first 5 years, we have an uplift from what we see as very strong embedded value within our land bank. So the margins in the first 5 years, we think we could carry out at an average of 30% roughly. And then in year 6, we would see it normalizing down to about 20%, which I say normalizing, but that's actually below our 20-year track record on margins. So we have another source of conservatism. If we think about a discount rate, we've selected 10% here, and you need to think about this 10% in the context of the conversation we just had about all of the attributes of our development business and what makes it strong and recurring being 10% in that regard, especially across the number of projects and the diversification of where this value creation is going to come from is very fair. And that's going to bring the overall discounted cash flow to about $7.7 billion or $10 per share. Now let me be really clear, this is ceasing any value creation activities after 10 years. So that's probably draconian. I believe we'll be developing logistics real estate for 50 years. So if you want to think about a terminal value on this business, we've done so. We did it in a way that we are using the year 10 start volumes, 0 perpetuity growth after that, but discounting all that back at the same 10% and that would uplift the overall platform value to about $12.4 billion or $16 per share. So this $10 to $16, depending on how you want to think about the terminal value is 2 to 3x greater than what we see embedded in consensus NAV valuations on development platform value today. Before leaving this page, I just want to make one other point. And that's that the assumptions here around margin, discount rate, growth rate, how to think about perpetuity, they all apply to a development business that I would say is on par with Prologis, namely our track record, our diversification, our monetization options, et cetera. Just meaning a company that has fewer of these qualities, I would expect is going to have even more conservative assumptions than we have displayed here. If I'm putting it even more, frankly, I would say if we had this conversation with regard to multiples on annual value creation per year, I would expect Prologis is going to have the highest multiple on its development value creation than really any other REIT. So we're going to have the same conversation now about our strategic capital platform, and we can look at a few other comps here, which will aid the conversation. We can look at public asset managers here. They have very visible valuations in the market. Many of them are public companies. So their fee streams and other qualities can be well understood. We're going to lay them out here, go one by one. And we're comparing Prologis' numbers to 2 things. One is an index of asset managers that we footnoted on the page. And the second is that what we've pulled out as the top-tier asset manager. The first thing that we think will help to find a high-quality asset management business is just what is AUM growth. It's really key to driving fees and scale and margin, obviously. And you can see the peer set that we've assembled, there's a 15% CAGR on growth. The top-tier manager actually is at 14%, and this is up against a 20% CAGR for Prologis. We're going to want to look at the FRE margin. This is fee-related earnings. You can see that Prologis here is meaningfully ahead, 20 to 25 points ahead of both the index and the top-tier manager. The percent infinite life of the AUM, how long life is the AUM? This is really important valuation, how soon can AUM extensively walk out the door. And you see Prologis, we talked about this earlier in Gary's remarks, 94%, and that's driven by not just our open-ended vehicles but also our public vehicles. We have our FRE CAGR, our fee revenue CAGR. We're meaningfully ahead on these as well. The percent of asset management fees to total fees, this is something that tells you how much of the income is driven by things like promotes because that's not going to be preferred and you're not going to want to see most of the income coming from those sources, we stand out here as well. So this all comes down to, well, what's the valuation multiple? You see the index has about a 24x. The top-tier manager has a 31x. But when we look within consensus NAV and extract outlet multiples are being applied to our business, it's about 20x. That's an 11x multiple difference, and that generates over $5 per share of shortfall in the valuation of this business. Now we can get there in 2 other ways that I think are interesting and really help support the conclusion. The first is on the left side of this screen, the sum of the parts valuation, which we see as a common approach taken by followers of asset managers. They take different fee streams, base fees as distinct from things like promotes and then in our case, also development fees, and they'll command different multiples. You have a 35x multiple on our base fees, and I want to be sure that that's understood in 2 additional ways. One is you can think of a 35x multiple as almost the inverse of cap rates these days, it's close. But this multiple is picking up something that's very important and distinct from a cap rate because this is picking up future growth of asset management fees, not just from each individual building within our platform, but from the new buildings that will come in and drive new fees on top of what is going to be relatively contained expense growth. So we expect to see margin expansion and higher bottom line growth, and that's further behind this 35x multiple. If you carry out all of that math, you're going to see it sum down to over $10 billion or $14 per share roughly. Now on the right side of the screen, we're putting up a discounted cash flow approach, which works very similarly to what we just took you through in development. We've laid out a handful of assumptions here. The cash flow is just the sum of what you see on the left side of the screen. And then we have a 10-year growth rate here of 5%. So let's think about the AUM growth rate that we just saw in preceding days in our history of about 20%. That tells you that this growth rate is very conservative. We have a perpetuity growth rate after year 10 of just 2.5% and then a discount rate of about 7%, which is more closely tied to real estate, which is natural for this kind of business, these kind of key streams. Interestingly, it comes down to about the same number, $10 billion to $11 billion or a little over $14 per share. So stitching all of this together, what we see embedded in NAV, and I'll show you this in just a moment. There's about $9 per share of platform value within consensus NAV today. That, combined with the 3 approaches that we've now taken you through, we can see that there is easily $5, a little over $5 of missing value in those approaches. So I will put all this together in just a moment. I want to hit on one thing first, which is there are elements of Prologis that are important value drivers, are real tangible cash flow drivers, but because of the shortcomings of NAV don't have a very good place for the valuation, and I'm going to hit on them here. The first is just our G&A scale. And many of you know this, but we're the best scaled industrial REIT. We have about a 16 basis point advantage in terms of G&A to AUM, that's 30% better than the average and that drives real valuation in terms of cash flow that deserves some quantification. We have a significant cost of capital advantage as many here know. It comes from 2 places. One is not just our leading balance sheet and the implication that that has on our credit spreads, and we have the lowest REIT credit spreads, but it's also due to our global footprint, our ability to tap global debt markets. And while we do that for natural currency hedging reasons with regard to FX exposure, it does offer us some of the lowest interest rates around the world, about 150 basis points lower than our peer set. That's clearly a real driver of value and cash flow missing from NAV. And then lastly, our essentials business, which is an emerging area for the company. We didn't spend a lot of time on it today. But many of you know that we're strong believers in its potential. And here, we have some conservative assumptions about what we think its pace and growth looks like over the coming years in terms of income it will drive to the bottom line. And if I put all of those pieces together, the following page will describe the assumptions used. But if I put that all together, it's about $8.50 per share just having no home in NAV really. So before leaving this page, I just want to hit on 4 other areas of differentiation that we see really can't be quantified the way the others were, but I think they are worth reminding you of. The first would just be our data analytics capabilities. We have an in-house team today, and that combined with the data we see stemming from a portfolio that covers 2.5% of global GDP is very powerful. We have our in-house research team led by Chris Caton who you've heard from earlier today and you know is a real thought leader, not just logistics, but global economics generally. We have our corporate ventures team, which has now invested in over 30 leading and potentially disruptive technologies to keep us ahead of the curve there. And lastly, ESG, where you know -- well, hopefully, you know from looking at our track record, we have many accolades and accomplishments here that are not just important to us, but really are key to all of our stakeholders. So on the last slide here, I'm just going to add up everything that we've gone through in this discussion. You have a table in front of you where we've sized these areas of differentiation, the strategic capital platform, the development platform and then these beyond NAV areas. I want to be clear what's in the consensus column. We've gone through all the consensus valuation models, and we see in the strategic capital platform, a value of $9 per share and in the development platform, a value of $5 per share. I want to be very clear on what's in this $5 per share. This is if we pull apart everything that isn't the book value of CIP and land, what are the other areas of value being given to us in terms of our development business, it sums up to about $5 per share, which is going to be made up of things like any land bank premium being applied, any CIP premium being applied or there are in some few and maybe 2 small cases, some small development multiple on value creations we see in a few of the valuation models. All of that lined up against what we just took you through in terms of what we see valuation ought to be and it sums up to a meaningful difference. You see this coming down to $25 per share valuation difference. That's over 20% different than consensus NAV. And the reason we think this is really important is that it has an effect of really distorting conversations that are then add in the market about what NAV premiums are being observed, what implied cap rates do we observe, what implied multiples, et cetera. Level setting and normalizing for these very important differentiating elements of our business is really important to knowing if we have that story together correctly. So I'm going to pause in a moment here. Hopefully, this section of our discussion was helpful just in terms of laying out what we see in very visible comps and methodologies and approaches that we brought on to value these businesses. I'd say more than anything, hopefully, the entire day has been a good and useful reminder of a lot of these really important differentiating elements of our company that makes Prologis truly unique. So with that, I'll pause here, and we'll be ready to take your questions.

Thanks for your time, and thanks for the thoughts today. I guess very helpful thoughts here. You laid out the DCF thinking 5% growth in the development platform over the 10-year period. But I mean how should we think about what's realistic? I assume it's not going to move in lockstep at 5% per year. So as you think about this cycle and some of the comments you made on the conference call on Friday about just how tight markets are, what does that trajectory really look like?

I can start, and I'll ask Tom to maybe pitch in some additional thoughts. I think that 5%, as mentioned in my remarks, is really just level setting a baseline. We would expect more growth just out of market share generally. And -- but if we just think about it from a cost perspective, I think even the cost perspective is going to give us much more than just 5% as we look at materials, labor, land costs by themselves. You're right that market share beyond that is going to drive it further. So Tom, do you have additional thoughts on that?

I do. I think when we look at just the demand pipeline, and if you look at Q3, we had 60% build-to-suit on a PLD share of $1.4 billion of starts. They are clear arrow up for starts going into Q4 and probably into 2022. Just looking at our development pipeline has maxed up with customer demand. So I think clearly, in the short to medium term, I would expect to see starts substantially ahead of that pace that we show here. But again, it's to Tim's point, we're trying to be just conservative and give you a baseline which to work off of.

Okay. And then can I ask a follow-up or?

Please.

Okay. You had also commented on the -- having more smaller investors in the fund platform. Can you just talk more about why that is an advantage? I would think that's actually less sticky capital and certainly smaller dollar amount. What's -- how should we be thinking about that?

I wouldn't think about it as being any less sticky at all. I think it just represents the diversification of our investor set. And I think the broader spectrum of investors that we can have is the better. And I think while there might be smaller investments, they have significant upside as well because we give them an avenue to deploy capital. So I think it's a great diversification to have big, medium and some smaller.

And as you think about the queue today, how is it broken out in terms of large versus small?

I don't have a -- I don't know that off hand. I think it's very diversified. I don't think it's weighted towards any particular segment. All segments are highly active. I know that for sure.

Can you hear me?

Manny, we can hear you.

So investors are focused on distribution trends, mostly at the U.S. level and a lot of the news flow we get is U.S., especially in e-commerce, et cetera. Following this presentation, I didn't realize how much of your development has been global. I don't know if I have a good feel for how much of the in-place pipeline and the future pipeline is sort of more non-U.S. or global if you want to use that term. So can you -- I don't know if it's a question for Chris or for Tim, but how much of the future development pipeline is global? What should we be talking about in terms of supply chain transformation on a more global basis? And then to tie in the strategic capital, how do your capital partners think about ex U.S. versus U.S. investment?

Yes, I'll get started. So Jamie, thanks for the question. Not Jamie, sorry, Manny. First off, as you saw from the slide, 70% of our value creation has been global -- excuse me, non-U.S. So that has been an important role, and I think it will continue to play an important role. And it's likely to remain majority non-U.S. from a value creation perspective. You're right, the trends are different. In some senses, the supply chains need to get rebuilt in the United States. But when we look internationally, whether it's the developed markets like Europe or more of the emerging markets, whether it's Mexico, China, you really have a wide range of drivers. First off, you do see higher growth rates from a share of the market that needs to be built. In Europe, it's really about building supply chains to serve the pan-European area versus individual countries. And in a place like Japan, it's different in that they had an export-led growth model. Now it's much more of a domestic consumption-led model. And so the product just needs to be different. So there are really exciting trends that are driving growth. E-commerce is also a trend internationally. So you're talking about e-com in Europe -- excuse me, e-com in China that's half of that marketplace. And in Europe, it's similar to the U.S. So you have e-commerce that's important, but then unique structural drivers around building out kind of first gen supply chains that drive a lot of opportunity for value creation.

Manny, I would just add that what we're really excited about is just the investable universe we have by being -- having a global platform. It just gives us so many more investment opportunities. The U.S. is great, have a lot of opportunities, but when you couple that with over 100 markets around the world, it just gives us incredible opportunities to deploy capital very profitably, which is what our focus is.

And is the demand or the appetite different from the capital partners whether you're doing ex U.S. or in U.S. development or contribution?

No, I think it's very consistent, and it's really a function of where our private capital partners want to have exposure, right, whether it's Europe, Asia, U.S., Lat Am, that's the driver. So again, we've got a full menu to offer to them. Just like we can develop globally, we can offer a menu of opportunities to our strategic capital investors globally, which is a key advantage.

Thanks for your presentation. I wanted to ask about the IRRs for developments internationally because Chris mentioned, it's about 200 basis points higher historically than the U.S. So can you elaborate what's driving that? Because I would imagine organic growth has been stronger in the U.S. than international. And then does this change your views about potentially keeping more of those assets on balance sheet?

So the way you're going to look at IRRs versus margins, it's really about time to stabilize. And so we do a fair amount of build-to-suit outside the U.S. We do a fair amount of build-to-suit globally, both U.S. and non-U.S. So there's going to be a little bit more build-to-suit and just slightly faster stabilizations are going to drive that difference in IRRs. As it relates to holding on balance sheet, I'll leave it to Tim. Can you take that Tim?

Well, we're basically holding our U.S. portfolio on balance sheet predominantly, although we've seen contributions increase into our open-ended fund at a little bit higher pace in recent years as that fund is looking for more avenues to deploy capital. We look at that from a sources and uses perspective each year in our capital planning and adjust accordingly. But everything outside the United States broadly we build on our own balance sheet, the exceptions are Brazil and China. And with -- outside of those exceptions, those assets would go into the funds in our contribution model.

And again, John, the focus is on trying to match non-dollar assets with non-dollar liabilities and non-dollar equity, which is what the strategic capital business allows us.

Do you think you make up for it in the multiple in your strategic capital business?

I think we make up for it from managing our structure, our FX risk and how that manages that takes to the FX movements out of the picture quite frankly. And then yes, if you look at whether it's return on equity or the scale power of strategic capital with fees and promotes, yes, I think we more than make up for it. But I would start to say it gives us a foundation to where we can operate globally in a very effective and risk-adjusted way from an FX standpoint. That's the platform that it gives us and then the returns are quite attractive.

Okay. And then a follow-up on the smaller investors commentary. Can you provide some more color on how small you're willing to go? And also, what are your views on the nontraded REIT market as far as attracting long-term capital?

I'll take that. So I think from how small are we willing to go, it really depends on the, I guess, the upside with those investors long term, right? You've got small investors that turn into big investors over time. So we're in this for the long haul, so we're very much interested in building relationships with investors because we're going shoulder to shoulder with them across these funds. So we do like to curate long-term relationships and some of them start small and we love to be partners with them. Your second question, can you remind me what your second question was?

The non-traded REIT market. I know investors can invest directly in PLD, but is that attractive to you at all?

I think we're always looking at different ways to source capital. We certainly have no shortage of being able to attract capital right now. Our queue as we talked about in our third quarter call are at record levels right now. It's something we'll watch. For a nontraded REIT, I doubt we'll ever go there. I'll never say never, but we're always looking to source different sources of capital, whether that's high worth individuals, for example, that might make sense at some point. A nontraded REIT probably doesn't make sense. But again, I'm not the expert on that, so I'll never say never.

Can you hear me?

It's Ronald. Yes.

Okay. Great. Just a couple of quick ones for me. One, just going back a slide on the land bank management, which I think was fascinating thinking about the 3 different buckets. Can you just remind us how do the cost in terms of maintaining those positions across those 3 buckets, if you could just give us a sense just basically the carry costs that you're taking on that optionality.

Sure. So I'll get started and guys jump in. So you specifically asked about carry costs. So we've got land just basic acquisition land, which is the traditional way we've approached it. You see the covered land play and the economics on the covered land play on the slide there with an initial yield that's in the 5 bit higher range. And so that is how the carry works on that one. Option land has an upfront payment that's really rather small as a share of the total value of the land. We're talking low single digits, 1% type number as an option payment and for us to gain control and be able to work the site in a way that we want to work it. So that's how it's going to vary across those 3 channels.

Got it. And just following up. So when you think about presumably your biggest competition is a local or a regional developer in sort of those various markets, clearly, there's an advantage with cost of capital or relationship. Like what do you think is sort of the biggest differentiator as you guys are competing in the market? Is it the cost of capital? Is it your relationship? What gets you over the edge? And how is that different in the U.S. versus internationally?

Yes. So first, a couple of answers to that. The first is, remember, we talked about 300 investment professionals to say nothing of the additional 500 that operate a portfolio. So we have people 800 people who are local. So in some respects, we are also a local operator who have an understanding and a vision. And often, we're #1, #2 in the markets where we operate. We see where the market is going. We have the vision to understand which are going to be the right spots, the most valuable spots to be developing. And it comes -- I think the relationship matters quite a bit. And it also helps that our teams get to focus exclusively on securing excellent sites and building on those excellent sites, and they don't need to bother financing them because they've got the team here. So I think they get to spend all their hours in a day focused on development and redevelopment, that's probably a secret power as well in terms of not needing to worry about organizing a way to capitalize those projects.

And I'd just add that yes, the local sharp shooter or the regional sharpshooter is certainly good competition, but we're generally the largest logistics operator in all the markets in which we -- and to Chris' point, we are the biggest player in that market, which gives us an advantage. I think our ability. And you think about the relationships that that gives us with local municipalities or local government, you start to layer in community workforce initiatives, all the things we're doing in the community, we're active. We're reinvesting in our community. So yes, they're good competition, but I think we have the biggest advantage just given with our presence and our community outreach that we do. And then cost of capital, all those things clearly play in. But just our sheer scale that we have at the local levels is a significant advantage.

And we have a question from Caitlin Burrows from Goldman Sachs. Tim, you went through PLDs, how PLDs fee-related margins are higher than other asset managers. Can you explain why this might be?

Yes. I think it's a function of being focused in a single asset class for one, being logistics. We're very focused there. And then we have a lot of scale in each of these businesses. If you think about each open-ended vehicle, just the 2 flagship vehicles in particular in the U.S. and Europe, they are nearly $20 billion in and of themselves. So as Prologis, the corporate entity has the lowest G&A to AUM, that scale is actually finding its way into what is occurring within the funds as well. So that would be a big piece of the margin pickup that we see in that business.

Yes. It's really -- to Tim's point, it's a 1 billion square feet that leverages both our Prologis balance sheet as well as the fund. So there are synergies that cross both.

Matt, we can't hear you.

Not yet.

I think you're saying we're doing great though.

Are we able to move to the next question and come back? Okay. We'll give that a try.

Can you hear me?

Yes.

Good. I was getting nervous you won't be able to hear me either.

It depends on your question.

So I guess, Chris, you've indicated that most industrial supply, I guess, today is farther away from the population centers due to the lack of land and I guess the entitlement process. I believe that was a general comment. Do you have that specific stat for Prologis' portfolio too?

No, I don't have it specifically for Prologis' portfolio. But let's talk a little bit about the scarcity of land and where projects are being built. If we think about -- like I said in the -- like I said earlier, New York, New Jersey is kind of 28 to 50 miles. If we look at the Bay Area or Southern California, it's kind 25, 30 miles out to 40 miles, so the distance is a little less. But then if you look at a regional market or markets we're not in, there's effectively no difference. And so because we are overweight to the coast and because we are overweight to infill and superior submarket locations, which is really the key point, you will find our portfolio is farther from new supply than anyone else's. And so that, I think, should be a key takeaway.

And is it important to try to get close to those population centers? I mean, is it even possible? I know Prologis has been pursuing the multistory development strategy. But what about, I guess, having higher clear heights and more automation? I mean is that technology getting more feasible to do that just kind of maybe it's been accelerated because of the pandemic?

Yes. So a couple of thoughts on that. First, multistory is one way that it's possible, and we have had projects, for example, Seattle Gateway and other projects that we're working on that are multi-story, but that's not the only way. And the answer is then, of course, for sure, it's possible. It takes a ton of work and effort and that local presence relates to Ronald's question earlier and really having conviction of view. And so you can also look at our covered land plays as one of the more visible vehicles that's allowing us to do this, not only get paid to wait to really work the upside on some projects. So if you look across any of our main global markets, both on the coast and on the interior, I think one of the key takeaways should be it's, yes, coastal, noncoastal is one way we can understand outperformance. But really, it's the submarkets. So we could also look at O'Hare, we could also look at Northwest Dallas. For sure, you can look in our California markets, New Jersey and elsewhere. What really matters is the vision and the willingness to really work, what can be complex and difficult projects to create real value over time. And there's really multiple projects a year that fall into this category.

I'm sorry, Mike, from a customer standpoint, there's clearly strong demand to get as close to the endpoint of consumption as possible, whether that's the doorstep or the storefront. And if you'll remember, research has put out some slides that talk about rent growth relative or rents relative to proximity. So clearly, the closer you are to that end point of consumption, the highest rents will be garnered.

I think, I guess, on Friday, you guys talked about a lot of this on the call is that customers just can't find space [ period ] right now. What are they doing to compensate for that? I mean are they just paying higher transportation fees just to try to move goods from point A to point B?

There's no single answer to that. In fact, that is happening. You're right. There are examples of that. Part of it relates to leasing space earlier. So customers are definitely becoming much more strategic about their network strategy. We've talked about that being important. And with that plan, they're able to see farther ahead for their requirements to make leases. So I think part of that -- the combination of scarcity and the ability to plan ahead, we see the development pipeline in the United States, more lease than it ever has been 69% is a really big number relative to historical averages, say, 40% to 50%. So part of it is planning ahead. Part of it is working existing assets harder to whomever they can to meet customer requirements -- their customers' requirements. Can't hear you yet. I think you're also saying we're doing a great job.

All right. Maybe we will try to come back again. All right. Well, thank you for participating today. We certainly appreciate it. We look forward to continuing this dialogue. And I also just want to do another shout out for our event, our groundbreaking event on October 27. So please visit our website, visit that presentation link. We'd love to have you participate in that event as well. So thank you all. I look forward to seeing you in person, hopefully, very, very soon. Thanks.

Thank you.

Thank you.