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

Well, good morning, everyone. Good morning. My name is Anthony Powell, and I cover U.S. REITs here at Barclays. I'm here today with Tim Arndt, CFO, Prologis. Welcome. Good morning.

Good morning.

Glad you could be here for us today.

Thank you.

Prologis is the -- I think the largest REIT that I cover, probably the largest publicly traded REIT in the U.S. covering the warehouse and industrial space. Recently announced a deal with Duke Realty, and again, one of the largest companies in the group. So thanks for joining us as well.

So this year, obviously, there is a lot of talk about Amazon e-commerce. This is a big source of our growth for the past few years, but in general, slowing down in leasing activity this year. However, when you look at your results, when I think any impacts or maybe go over what Amazon did and why their activity has really impacted your growth?

Yes. Thanks for the question. Great to be here. Amazon, as the largest e-commerce player is certainly a big part of Prologis' story. They are our largest customer, but still just at that number less than 5% of our overall rent roll. And e-commerce at its simplest has been a big driver of the increase in need for logistics space in the last 10, 15 years and really accelerated significantly through COVID as most everyone here would know. That's why when they came out in the spring and had made some announcements about their profitability, the increase in operating costs that they saw from both their supply chain but also even their employee base and the fact that maybe they had taken up too much capacity for their future growth, it certainly jarred the market overall, all corners of the market and logistics companies, in particular, what they had announced at the time was an indication that they would, I would say, give back space, but that meant more in the sense of the conjecture was subleasing space, finding more efficient ways to carry it through what they thought was a short amount of time until ultimately the demand side on their end grew -- they would grow into it, both on a space needs and employee base as well. And at the time, there being a lot of estimates and conjecture about how much space that would ultimately be on there being some pretty big estimate. And to answer your question, concretely, what we saw in the end, we have heard out of our roughly 150 spaces, there were some early dialogue that they might want to delay occupancy of 2 to 3 of those. In the end, over the summer, those conversations died down completely, and they're not delaying the take-up of any space or subleasing any space. And our understanding of the market, we don't have perfect visibility is that, that really didn't take place in any regard across much of their footprint. So it wound up being a bigger scare, I think, for the market then turned out to be the case. They are really good at securing space, keeping their supply chain flexible, and this looks like a step to figure out the right way to control some cost until the demand side ultimately picks back up, but they seem stable now.

And so Amazon is stable. What kind of tenants are actually out in the leasing space today? Who's out in the market? How has that mix changed in your portfolio over time? And long-term, where does e-commerce go as a percent of your tenant base, do you think?

So we have a page on this in our presentation, which tells an interesting story because as much as e-commerce has been an important driver of demand for our space, our ultimate occupancy and demand is not reliant on it. And this presentation in the book gives a depiction of how much space is being leased to Amazon as well as other e-commerce players and then everybody else. And you can certainly see that Amazon and e-commerce players took up a lot of space in 2020 and then as well into 2021. But as that did slow, you see there are many other names willing to come in and lease in the market. And at the bottom of that chart, what we reflect is our overall occupancy levels in our portfolio, which are steadily climbing despite a little bit of a pullback in e-commerce, so I think really telling the story that the demand is very broad-based. And I would just highlight that occupancies at our levels, which, call it, 97%, a little bit north of 97% at this point is exceptionally high in logistics, if you don't follow the space. We would say that historically at a market level, 94%, 95% is the right level of market occupancy for a good healthy functioning market to be able to have the -- our customers move in and out of space, expand and contract as necessary, et cetera. And at 97%, which our portfolio is at and the market is not far off from there is so tight, it's really driving these important price dynamics that I'm sure we'll get into. In terms of specific segments or classes of customers who are taking up all the rest of that space, Anthony, I would say it's really broad-based in truth. We have a habit of trying to tell our investors every quarter who in this quarter took up a little bit more than average space. A quarter or 2 ago, it was transportation and 3PL guys. What I see so far in the third quarter is more from retailers. But I think in a single quarter, it's hard to get a read. I would look across 4, 6 quarters for that kind of information. And by right of us being such a large company covering so much of the economy, we're not going to see very material shifts on that basis.

Your retail comment was interesting because we read headlines all the time about inventory concerns at retailers, whether it's target or specialty retailers that you're just saying now that were taking up more space. So maybe going to the dynamic of how inventory management of a retailer impacts their demand for your space over time?

Yes. And I'll answer that question, and I'll also start by saying that reading headlines from retailers where they're talking about their supply chain, their warehouse needs, their inventory problems really requires a thorough read of all of their comments and analysis to understand what they're saying because our read and what we're experiencing and in our close dialogue with them is that while they're citing inventory issues, and it's typically being along the lines of we don't have the right inventory at the right place for when things need to be sold. The read-through is that they actually need more space actually, so they can have the right inventory in the right places and being more nimble in their supply chain. Our space has evolved in the last -- I've been with the company nearly 20 years. And our space used to be strictly a cost center for many of our customers. They needed a place to store their goods. It didn't matter how close-in it was. They need it, in that regard, the cheapest warehouse they might be able to find. And today, with the advent of e-commerce, the Amazon effect, that's not the case. People need to be close in to customers to hit service levels, to hit next-day deliveries, to hit same-day deliveries. And even if you're a brick-and-mortar player, you need to have your shelf stocked to compete with Amazon as well. So you don't even need to be in e-commerce to have the same need to be in-fill. So that has really changed the dynamic in the last few years. With regards to how they're thinking about inventories, what we've gathered and also inherent in their comments is they need more safety stock. I think the best story to read on this would be Target. In the second quarter, they had released some color on how they were thinking about inventories in their supply chain in early June. And their comment was we're seeing customers leave the store, kind of their worst nightmare, empty handed. They came in. They made the effort to come in and procure whatever they needed, but it wasn't on the shelves and they had to leave. And they lost that sale and now they have customer reacquisition cost to save. So they need to avoid that. So the headline was Target had too much inventories, but the readthrough was that diagnosis of their supply chain and also some commentary that they were going to expand 5 additional distribution centers to help fulfill it. And I think in results with commentary, they needed their vendors closer in and better stocked as well. There's this proliferating effect that this can all have. So the read-through you have to be very careful about, and we've seen that commentary very consistent across our customer base.

So you talked about all the sources of demand in the past few years and has driven really strong rent growth for you and the industry. I think this year you expect 20% rent growth on a market basis, which is very strong higher than what we see elsewhere in real estate. Lease mark-to-market is 56%. Can you maybe go through how those numbers have built over time and how they impact your annual expected NOI or FFO growth over the next few years?

Yes. I'll take the last part first. So we -- again, being at the company for a long time, we never measured this thing that we call lease mark-to-market today, which is just a measure of how much higher our market rents than our in-place lease is today because for a lot of my career, maybe that difference wasn't so interesting or important. It was 5 or 10 points higher, and it said that whenever we get around to rolling leases as leases expire, how much upside was there when we ultimately flip it to market. For your information, logistics leases tend to be 5, 6, 7 years. So you're rolling something like 15%, 20% of your leases every year on a square footage basis. So that metric today is very important. And you see us and some of people in our sector reporting on lease mark-to-market, and it's 55% as we measured it at the end of the second quarter, 55% higher rents on our rent roll is about $2 billion of incremental NOI EBITDA flows down to earnings ultimately as well. Now we don't get all that next year. We have to wait this roughly 5 years that we're talking about. But that $2 billion is also without any future market rent growth. That's just how the world looked on June 30, '22. If there's no further rent growth and everything just went to market, there will be $2 billion more dollars. We forecasted that we think there's about another 10 points of market rent growth in this year '22. We've not yet given guidance on '23. But our expectation is that market rents will continue to grow, which keeps that lease mark-to-market elevated.

Yes. So usually when you see these strong rent growth, you see a ton of supply coming into any real estate market. But sounds like for you, supply growth looks to be in check in most of your markets. Can you talk about the barriers to supply growth in your markets and how you expect the supply growth to really impact the overall market rent growth outlook for the next few years?

Yes. You're right, supply, these are simple buildings in some ways to build or they used to be at least, single story, 30-, 40-feet high. You need a lot of land to build them, but it certainly was the case as strong demand stories came into certain markets. If there's greenfield land, there could be a lot of supply that came in very quickly to meet it and kind of headed off market rent growth from my earlier comments that we've never seen the kind of rent growth that we see today. I think out of -- the GFC wiped out a batch of developers. It changed the way capital looks at this development. The financing is tougher, the loan to values are lower, the return requirements became more challenging. So there's just a cost of capital element that is very significant today, by the way, with where the 10-year is, et cetera, borrowing capital for this investment has only gotten more challenging. But I think more importantly, per my comments where the space needs to be closer into city centers, closer in for e-fulfillment in the populations, our typical building is going to need somewhere between 12 and 20 acres, let's say, between the building itself, the coverage you need, the parking, the trucking that needs to come in. If you think about our markets, Tokyo, London, San Francisco here in the New York, New Jersey area, it's very difficult to find 12, 20, 15 acres of land for these kinds of developments. So that is also a big barrier to new supply that we've seen in recent years. I'll mention one more, which is just good for the asset valuation. Generally, it's just also replacement costs. The cost of the investment of these kinds of facilities has risen dramatically, particularly in the last, I would say, 3 to 4 years by right of what's going on in the rent picture that winds up accruing to land values ultimately. If the rent of the real estate can be very high, the value of the land underneath it is going to, of course, rise. So land values, especially for the kind of land you need in our space have risen significantly. Steel, concrete, labor, everything else, we've seen probably a doubling of replacement costs in the last several years. So the check sizes are just much larger as well.

So when you look at what's in the pipeline now for supply growth versus what the demand could be, maybe talk about how many years or whatever or months, do you think that demand would take to really outstrip -- supply will take the outstrip demand, rather?

Yes. Yes, you asked it in an interesting way and we actually have a metric on this. It's also in our book, but we -- there's a lot of commentary in the last 2 years or so about gosh, there's a lot of supply. There was 350 million square feet of supply, 375 million square feet of supply. This is in our markets in the U.S. And those were historically high numbers. We used to see supply numbers in the mid-200 million square feet kind of range. And we kept trying to enforce with investors that yes, it's high, but look at the demand, the demand is actually higher. And we've seen that for the last 15 years or so, demand has been outstripping supply, and that's what's driving the vacancy rates lower and lower. We've even said we believe if there was more supply, there would be more demand. The demand was actually being constrained by how little supply was actually coming in. So given the fact that it can be a pretty murky picture to fully understand, well, is this a good amount of supply or not, we developed this metric in the book that we call 2 months of supply. And it's a ratio and in the numerator we've got how much standing vacancy is in the market, and we add to that how much unleased development space is coming into the market for the standing pipeline, and that's all the space that could be leased. And we look at that in comparison to how strong has demand been in this market in terms of absorption in the last 12 months. So that's the pace. So now we can create a ratio of well then, how many months would it take to lease all of this vacant space. And in our book, we show that, that's registering about 20 months today, which is about its lowest, I think, looking at my team here, but I think the lowest we've seen is about 18 months from memory. And what would be more normal in periods like this would be into the 30- or 40-month range. So it just speaks to all sides. Is there enough new demand, outstanding vacancy, how strong is the market overall and puts it into one metric.

Right. You talked about those high barrier entry markets like New York, San Francisco, L.A., Tokyo, are they seeing some of the strongest rent growth? And what about other areas of the country with population growth and maybe more areas for building like Dallas or Phoenix or whatever the Sunbelt as we refer to.

Yes, certainly. So there's certainly a bifurcation in the rent growth levels that we have. And if I pin it back to this lease mark-to-market again of 55%, that's going to be at its highest, probably near 100% in L.A. or New York, New Jersey, our customers are facing and executing a doubling of their rents as they come up against their renewals. And then more interior markets. And we're not in many of them, we're pretty selective but that's going to be more muted, where we've got double-digit rent growth annually in these coastal markets. It's not only coastal, by the way, I should add, it's -- Toronto is excellent. Many of our markets in Europe are excellent. Chicago has turned out to get much stronger. So it's not only the coast. There's been some confusion there. But yes, contrasting that with places, other markets we're in like maybe we have a presence in Indy, we have a presence in Columbus, which are good total return markets for us between going in and the growth profile. But it does mean their growth will be a little bit behind what you see in these larger markets.

And maybe one more on the operations. Essentials has kind of been a big part of what you've talked about in the past couple of years. Maybe going to what the business is and what you offer to your tenants, the size of the business ultimately and how it's been growing versus your expectations?

Yes. So I'll back up by saying we consider ourselves in 3 businesses, really, historically, a rental business, which we're talking about here, but also a strategic capital business. We own nearly half of our assets in public or private vehicles that we earn fee streams off of. And then development, we consider a separate segment. Anthony is referring to as not a full segment yet, but a new growth business for us that we call Essentials, which was a realization that at our scale and being more customer-centric, we have a lot of ability to help our customers procure goods and services that they need in their facilities that they're often, especially as small and medium enterprises procuring on their own, and we can help them not only gain better access to this, but probably at more favorable either service levels or prices but there would also be margin in that for Prologis as well. So we've stood up this business, we call it Essentials. We think of it as covering 5 discrete areas for our customers. One is operations. And operations, you can think about you step inside a warehouse, you're going to see racks, you're going to see forklifts, you're going to see packaging materials, all of that kind of equipment, we can help our customers procure. We think about it in energy is probably the largest of those businesses, and we can maybe spend a couple of minutes more on energy in a minute. But our roofs we have 1 billion square feet of real estate, which kind of means we have 1 billion square feet of roofs also and logistics roofs are a great place for solar panels. And today, we are the third largest private generator of solar power in the U.S. Today, we only have about 4% of our portfolio covered by solar. So even at that measure, we have a lot of runway, and it's a big focus of the company to add much more solar. We have a goal in our -- in terms of ESG to be generating 1 gigawatt of power on our roofs by 2025, just a few years out, and ultimately seek much more penetration there. And that power can be sold to our customers. That's a green offering that they will mostly want. And -- so that's a big tenet of the energy component of Essentials. The third component would be Mobility. We call Mobility. There's a lot of products that we will ultimately see in Mobility. But today, the one we're most active on is EV charging at our facilities. This is not -- so it's clear for the employees of this facility, this is up at the docks or near the docks for charging of the trucks, the short term -- or the shorter distance vans, sprinter vans to do charging of EV fleets that we see many of our customers bringing on in the coming years. You may know Amazon's got 100,000 vehicles on order with Rivian, and there's many other stories like that where this is a 2-sided market, we need the vehicles to come and they are coming, but they need a place to charge all of these vehicles and the place where -- what we've realized is the place where vans are most idle and the best opportunity for them to get charged is sitting at a dock in our warehouse getting unloaded and reloaded. So there's a real natural affinity to the power consumption occurring there. And net convenient that the power is also being generated on the roof, 2 income streams we're not often thinking about when we're investing in logistics real estate. The last 2 areas, I know I'm going along here, but is around workforce. Labor is a big issue in our sector, and there's a number of avenues we're exploring providing better services to our customers around workforce. And finally, data and digital. There's at 1 billion square feet. We see a lot of economic activity. We know a lot about customer operations, the willingness to share information, share learnings is evolving, but we see that as a big area within Essentials as well.

Can you remind us how much NOI or revenue you expect to generate in the segment over time?

Well, so in this year in '22, all of that activity, I would say, the one that's furthest along is energy, just to note, and has the clear line of sight on the growth in the next few years. It's contributing $0.08 to $0.09 of our -- guidance is $4.54 or so -- $4.56, I think, on this year. So it's modest at this point. We spoke to the growth of this business in a couple of ways. One, we've just said it. It's just in absolute terms of revenue. We think this is a $1 billion business eventually. We didn't put a date on that yet. That was really to give people an indication that we don't expect this to be a $100 million, $200 million business for a long period of time. This is going to be a very meaningful component of our company. And then we've also spoke about a growth rate. We could see this business doubling in a year, maybe doubling again 2 years after that. We don't have guidance on that in '23 yet, but that was kind of thrown out as an indication that it's going to be a swift pace. This is not going to be a 10%, 15%, even 20% growth business. It's going to be pretty rapid, in fact.

Before I move on to the other questions, anyone have any questions in the room? Any questions for Tim on operations or Essentials or? I will come back to Q&A later as well. So on to development, which you mentioned that's kind of another part of your business. Typically, you start the year with the development guidance number and you increase it as things kind of progress. This year, I think you kind of maintained your guidance, which some people saw as more conservatism. Maybe talk about how your first guidance is generally, what you think about it this year, and medium term, how it kind of drives your FFO growth?

Yes. So we, again, just level setting on our scale, we're developing about $5 billion roughly of new projects a year. That's around the globe. 30%, 40% that will be in the U.S., 1/3 of that might be in Europe, a large component in Japan and then small components in Mexico and Canada and Brazil and China, sorry, would round all of that out. And you're spot on, I think in all my time here, I can't think of years where development start guidance wasn't steadily kind of increased throughout our earnings calls for the year. It's been an interesting year. We've had kind of 2 stories over this year. Our first opportunity to increase that starts guidance was in April, and we held it constant then not out of any concerns on the economy or anything like that, but it was more just what was going on in the supply chain and getting materials necessary to ultimately finish buildings -- start and finished buildings and also labor. Labor is really scarce. The conflict in Ukraine had emerged. We knew that was going to be a delay ultimately on deliveries. And so our conservatism there was really around how many more projects can we start regardless of our interest in doing so just logistically. In July, we also held our development start guidance. I think partially for the same reason, we have pretty good visibility into what we are going to start. And by then, of course, headlines were mounting and I think like any company, we start looking at things a little more selectively and elected to hold our guidance on that basis as well.

You talked about labor and, I guess, procurement, supply chain issues for development, have any of those started to ease in your favor in the past few months.

I don't know if I could say in our favor, but I think there is an easing. I don't know that I know of an easing on the labor side. We all know the labor market remains excellent really. And the challenges any of us have in procuring labor exists in the construction of our facilities as well. Steel is flowing better. Steel prices are way down. Lumber is flowing better, those prices are down. What we've found that I think is interesting is the last little bit of goods, you need to finish the building, the one I chuckle about is there's those bars on doors, on emergency exits, you have to press to go out the door, if you can't get those bars you can't finish your buildings now. So there's always something that you're waiting on to get that final certificate of occupancy and get things stabilized, but we're working through it.

Right. You did increase your acquisition guidance by $500 million to buildings and land. Can you talk about what you're seeing in the market as capital markets are more volatile? Are you seeing more sellers wanting to sell assets to you?

It's interesting, and we should talk more about values, but specifically on acquisitions. That's a function of some really good activity we've seen in Europe, in particular. We were talking earlier, Anthony and I, Prologis, if you know us, we've had a lot of big public M&A here in the U.S. We're in the middle of a deal right now. But we've had pretty good sized private M&A in Europe, EUR 0.5 billion, EUR 1 billion portfolios that come our way, and we're seeing that kind of activity in Europe and attractive returns.

Right. So your point about value. So obviously, cap rates valuation have a big swing on stock prices and deal activity. So what are you seeing in terms of cap rate expansion year-to-date or cap rate is really the best way to look at the business, just maybe just go into that discussion.

Yes. Yes. Cap rates are a dangerous way of looking at the business right now, I would say, because I think the quotation methods vary so greatly between what's the numerator and what's really embedded in your denominator. The noise in there has never been as great as it is today. And I would make this mathematic point that I think is not always understood because I think people hear cap rates expanding and think it means, oh, okay, so values are dropping. And that is the right math if the numerator is relatively constant. But the numerator in our business is growing so swiftly, either in-place rents or market rents that you could have flat values, right? And the numerator is growing so fast, yes, the cap rate, the return is increasing. And actually, what we've seen is beyond that, that the values are increasing, I would say, despite rising cap rates because the numerator is growing so swiftly. Now the people have been wondering, well, what's going on now? They hear deals getting retraded. But the market is slow. I do think the market is slow. The amount of visible transactions to observe pricing from it is much more limited, which I also take to mean willing sellers in the market are few as well, and that's an important kind of footnote on that debate. But in the summer, in the third quarter, I would say we've probably seen cap rates expand another 25, 35 basis points. And this could be a time where we don't have a good read on rent growth in the quarter yet, market rent growth. But maybe this is going to be a time where we do see that flip the other way, and it actually would suggest a value decline from, say, second quarter levels. I expect to see that particularly with appraisers. So we have a large fund business I spoke to. About half of our assets get appraised every quarter. They do that generally on a comp basis. They don't do it on math theory. They do it on what deals are trading. And I think that could point to some write-down in values this quarter from appraisers. But our view is that over the long term, certainly, the demand for our space, what it's going to mean the market rent growth is going to go past any expansion in return requirements. The 1 footnote I would put on it is in our asset management business, our strategic capital business, we have the right-to-earn incentive fees. We have a large one that's due this quarter out of our Europe fund, and it's a large component of the earnings we have planned for the year. That's going to be highly leveraged to ultimately what asset values are. And if there is a backup on values, the promote could come out at a different number than we had contemplated, but there's actually other factors like what's the debt mark-to-market, what are the FX values. So there's a lot in the soup right now. We're not changing our view, but that's going to be something that is volatile in the quarter.

I guess on that point on extreme capital maybe talk about what it is? So people may not know exactly what the business is, how that drives your international exposure. So it's really a big part of the story and maybe focus a bit more on that appraisal risk or whatever for this year but also next year. I know there's a big promoter to guide the commentary for next year. So maybe talk about all those 3 components.

Okay. The strategic capital business, when I joined the company, we called it private capital, but it goes back to our founding. Actually, our current CEO, founded a company AMB in 1983, a strategic capital business. We're always an asset manager until we rolled up the portfolios in '97 when we went public. So it's a big part of our DNA. It's about half of our real estate holdings, a little less than half, live in some strategic capital vehicle, of which there are roughly 10, 2 of them public, 1 in Japan, 1 in Mexico; 3 of them are open-ended funds. And these are sizable ventures. They are our flagship European fund and our flagship U.S. fund are $20 billion, $25 billion each on their own. They're open-ended in format where investors come in and out every quarter at these appraised NAVs and then a few joint ventures. This is just a great way to own real estate. It diversifies our capital sourcing. It's very ROE accretive to the ownership of the real estate by right of the fee streams, we're going to have roughly $1 billion would be embedded in our guidance in revenues between our asset management and other fees as well as the incentive fee that we've talked about. So it's a very big business for us. And to the point you made on exposure, and we should maybe talk about FX because we're a global company, but pretty unimpacted by FX, which I can explain. But that's partly the reason, a big part of our asset base. Well, I should say everything that's stabilized and operating outside the United States is owned in one of these ventures, which gives us the customer access. We own the real estate. We operate it, but the capital exposure is reduced through that partnership. Your question on valuations. I guess the -- and you said that there's another promote that's earnable next year, which is in our flagship U.S. fund, and that's true. It would be the same open question of ultimately what goes on with valuations and what goes on with appraisals. I think the one thing that I would call out that this is almost -- I think it's fair to say an issue of timing in some sense in that if you had a promote period come up where the NAV fell off, the valuations were down and it resulted in a lower incentive period. Well, that new mark becomes the mark that you need to grow off for the next incentive period, which in these open-ended funds is every 3 years or so. So you almost have some built in potentially gain for the next promote. So it is sort of unfortunate that things get measured on a single day. But ultimately, it will all come through, and it's just a matter of timing.

Okay. Any more questions from the audience before I go on to the next few. All right. So I guess, I mean, a lot of the talk about valuation and cap rates, it's really interest rate driven. So maybe talk about interest rates impact on your business overall and your ability to finance the business? And maybe talk about your sources of capital generally kind of debt use, equity, bringing capital from overseas, maybe discuss how you fund the business?

Yes. If we think about our funding need as -- let's just call it that, that $5 billion of development that we execute in the year, that's let's call that our funding need. What Prologis does is as we stabilize those developments we offer them to the strategic capital vehicles that I mentioned, the 10 vehicles around the globe. They buy them at appraised value, and we get capital back that gets reinvested into next year's development team. So if there's $5 billion of development needs, we might get $2.5 billion, $3 billion of that capital back ultimately through this contribution recycling process. We're a REIT. We have the dividend, our taxable income. But beyond that, we retain cash flow. We probably are retaining $1 billion to $1.5 billion of capital a year. So the point being our marginal capital need is fairly light going into any year from all of that recycling and retention of cash flow. With regard to the debt market, we're sitting at June 30 with an average interest rate, I think, of 1.8%, about 10 years remaining, not original term, but remaining on our debt. We've had a great ability to tap non-dollar markets over the last 12 years or so, really. It's part of our FX strategy. We strive to have very little of our equity base ultimately exposed outside of dollars. And part of the other way that we do that is at the corporate level, whatever corporate financing need we have, we tend to favor non-dollar currencies for that reason to limit the FX exposure that then remains. Now we see rates around the globe have increased dramatically. We -- I would see 10-year borrowing rates for us around 4.5%. Europe is basically the same 25, 50 basis points. So it's a meaningful step up where we're pretty well insulated is we've been very active in addressing maturities early and ahead of their due dates. We have no large corporate bond maturities until 2026. This is before the Duke transaction, they'll bring some maturities, but those seem manageable. So the only thing we'll be hitting the capital markets for in the coming quarters and years would be really this growth capital.

Right. Understood. All right. Maybe one more. ESG, I think you announced a goal to get to net-0 emissions by 2040. Talk about how you can give there, the importance of that goal to the company, how Essentials plays into that part? Just and we'll close with that.

Yes, the goal is extremely important to the company. I think we've always been one of the more sustainable real estate developers. Everything we build is to some minimum LEED, BREEAM or CASBEE certifications. There's different models around the globe that we follow. The development of a solar energy program, the EV program are part of that same DNA that we're always looking at how we can develop and operate our buildings more sustainably. The 2040 goal was a big deal for us. We didn't take it lightly. I mean one, if you're following a lot of corporates, 2040 is the inside of what a lot of folks are promising. You see a lot of 2050s out there, which feels more like a hope for a lot of companies. The fact that we made it net-0 and not just carbon-neutral is a different bar. It's a strategy that can't sit there and rely on carbon credits and offsets, it's got to be tangible. So it's a net-0 goal. And we've added science-based targets to the evaluation of that program as well. So it's robust and it's rigor. Solar, you tied that into Essentials is a big part of the way we get there. One of the first milestones you can measure us on is by 2025 we plan for carbon-neutral construction. That is something that will be both the construction activities as well as some carbon offsets in the short term, but ultimately, that's how we plan to conduct our development opportunities and that's another important path on the march to the 2040 goal.

Okay. I think we're out of our allotted time, but if there's many 1 more questions in the audience, we can address it, but not...

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Well, I think we have a lot of flexibility. Now I got the question -- your question was what if -- I don't know if you mean the debt markets, in particular, dry up on the growth capital or...

You were talking about the ability to sell into the third-party funds...

Yes, yes. No, that's a great question. If our funds don't have capital to buy these assets, what happens? Does the machine stop? And I would say, no, we will have to take things carefully and slowly in that kind of circumstance. Today, the funds -- I shouldn't say today, June 30, stood with about $2.8 billion of equity queue to be drawn for all that investment. But being open-ended funds, people can redeem that can shrink. I think in that scenario, we would -- we plan to hold every asset the way as CFO and formerly treasurer the way we capitalize the balance sheet, we plan to have the liquidity for that. We plan to have the leverage capacity for that within our credit rating. So we'll be happy to hold assets through an environment like that until some of the private equity perhaps returns, disposing of assets is something I didn't even mention and with regard to different capital sources, there's always a culling of our portfolio that we transact in as well. So I think there's a lot of levers, but I think the most important maybe to know from a risk perspective is we approach it on the balance sheet as if we are going to own it. We're going to need to finance it fully and then own it. And then the contribution model is just sort of upside, maybe one way of putting it in our ongoing sources and uses. Thank you.

All right. Tim, thanks a lot for your time. Appreciate it.

Yes. Thank you. Thank you. Thanks.