Prologis (PLD) Q4 2021 Earnings Call Transcript

Prologis (PLD -1.57%)
Q4 2021 Earnings Call
Jan 19, 2022, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Prologis Q4 2021 earnings conference call. [Operator instructions] It is now my pleasure to turn today's call over to Jill Sawyer, vice president of investor relations.

Please go ahead.

Jill Sawyer -- Vice President of Investor Relations

Thanks, Brent, and good morning, everyone. I'm standing in for Tracy today. Welcome to our fourth quarter 2021 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations.

I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statements notice in our 10-K or SEC filings.

Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we have provided a reconciliation to those measures. This morning, we'll hear from Tom Olinger, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Dan Letter, Ed Nekritz, Gene Reilly and Colleen McKeown are also with us today.

With that, I'll turn the call over to Tom. Tom, will you please begin?

Tom Olinger -- Chief Financial Officer

Thanks, Jill. Good morning, everyone, and thank you for joining our call. The fourth quarter closed out a year of record-setting activity across our business. Core FFO was $1.12 per share, with net promote earnings of $0.05.

For the full year, core FFO was $4.15 per share, with net promote earnings of $0.06. Excluding promotes, core FFO grew 14% year over year. Net effective rent change on rollover accelerated to 33%, up 510 basis points sequentially and was led by the U.S. at over 37%.

Average occupancy was 97.4%, up 80 basis points sequentially. Cash same-store NOI growth remained strong at 7.5% for the quarter and 6.1% for the full year. I want to point out that we're modifying our in-place to market rent disclosure to standardize this metric among logistics REITs. This collaboration is an extension of the work we've done to harmonize other property operating metrics.

We have collectively defined net effective lease mark-to-market of our operating portfolio as the growth rate from in-place rents to market rents. This now aligns with how rent change on rollover is expressed. Using this new definition consistently applied, our net effective lease mark-to-market at year-end jumped almost 800 basis points sequentially to 36%. This current rent spread represents embedded organic NOI of more than $1.2 billion or $1.55 per share that we will capture without any further market rent growth.

Turning to strategic capital. This business continues to drive tremendous growth in value. In Q4, we completed the early wind up of our highly successful UKLV venture. UKLV's $1.7 billion of operating assets were contributed to our PELF and PELP Ventures, we earned net promote income of $0.05 in connection with the closeout of this venture and our percentage of infinite life vehicles has consequently grown to 95% of our $66 billion of third-party assets under management.

For the year, our team raised $4.4 billion of third-party equity. After drawing down $1.9 billion in our open-ended funds for acquisitions during the year, equity Qs stood at a record $4 billion at yearend. On the deployment front, we had a very productive and profitable year. Development starts totaled $3.6 billion with margins of 32%.

We continue to maintain a long development runway with a land portfolio able to support $26 billion of future starts. Stabilizations totaled $2.5 billion with estimated value creation of $1.3 billion and average margin of 53%, both all-time highs. Realized development gains were $817 million for the year, also an all-time high. These results are the product of our highly disciplined team and an incredibly strong operating environment.

For our customers, the importance of the health of their supply chain and the real estate that underpins it has never been so critical. We believe the current global supply chain challenges will continue well beyond this year. Fortunately, the scale of our 1 billion square foot portfolio puts us in a unique position to help our customers address these current supply chain challenges. This includes shortening construction delivery times by navigating raw material shortages and leveraging our Essentials platform to procure warehouse equipment and services, so our customers can focus on their core operations.

We're also investing in technology and talent to support our industry-leading sustainability objectives, including our efforts around renewable energy. Market dynamics today are highly favorable and demand has never been stronger. During the quarter, we signed 62 million square feet of leases and issued proposals on 90 million square feet. Demand is diverse across a range of industry end customers.

E-commerce made up 19% of our new leasing this quarter, with further broadening of customer diversity. We signed 357 new leases, with 265 unique e-commerce customers in 2021, both of which are high watermarks. Demand is fueled by three forces. First, overall consumption and demographic growth require our customers to expand.

Second, customer supply chains are still repositioning to address the massive shift to e-commerce as well as preparing for higher growth and service expectations. And third, the need to create more resiliency in supply chains. Inventory to sales ratios are more than 10% below pre-pandemic levels. Our customers not only need to restock at this 10% shortfall but build additional safety stock of 10% or greater.

This combination has the potential to produce 800 million square feet or more of future demand in the U.S. alone. Collectively, these forces have placed a premium on speed to market and flexibility, driving demand for years to come. From a supply perspective, construction underway in the U.S.

is approximately 70% pre-leased, which is well above the historical average. We believe demand will balance out with supply in 2022, and vacancy rates will remain at record lows in both our U.S. and international markets. Competition for limited availabilities produced yet another quarter of record rent and value growth.

In the fourth quarter, rents in our portfolio grew 5.7% globally and 6.5% in the U.S., bringing full year growth to records 18% and 20%, respectively, far exceeding our initial forecast. This growth, paired with continued compression in cap rates, is translating to record valuation increases. Our portfolio posted its highest quarterly value increase, rising more than 12.5% globally, bringing the full year increase to a remarkable 39%. Now moving to guidance for 2022, here are the components on an our share basis.

We expect cash same-store NOI growth to range between 6% and 7% and average occupancy to range between 96.5% to 97.5%. We are forecasting rent growth in our markets to be 11% in the U.S. and 10% globally. For strategic capital, we expect revenue, excluding promotes, to range between $540 million and $560 million.

We expect net promote income of $0.55 per share for the year, almost all of which will occur in the third quarter and is driven by our PELF venture. While a record, given the significant increase in rents and valuations, we would expect to see similar or higher promote levels in 2023. In response to continued strong demand, we are forecasting development starts of $4.5 billion to $5 billion, with approximately 35% build-to-suits. Dispositions will range between $1.5 billion and $1.8 billion, two-thirds of which we expect to close this quarter.

We're forecasting net deployment uses of $2.3 billion at the midpoint, which we plan to fund with $1.6 billion of free cash flow after dividends and a modest increase in leverage. We project core FFO, including the $0.55 of net promote income, to range between $5 and $5.10 per share, representing 22% year-over-year growth at the midpoint. Core FFO, excluding promotes, will range between $4.45 and $4.55 per share or year-over-year growth of 10% at the midpoint. Since our Investor Forum in 2019, our three-year earnings CAGR has been 13%, excluding promotes, well ahead of the 8% to 9% CAGR forecast we originally provided.

Before closing out, I want to spend a minute on the quality of our earnings drivers and differentiators, which set Prologis apart from other real estate companies. We continue to drive strong organic growth and aren't reliant upon external growth to achieve sector-leading results. In fact, approximately 75% of the increase to our core FFO for 2022, excluding promotes, is derived from organic growth, principally same-store NOI and strategic capital fee-related earnings. It's important to point out that in 2022, our strategic capital revenue, including promotes, will be over $1 billion, a new milestone.

This high-margin business generates very durable fee streams with asset management fees marked to fair values each quarter, all while requiring minimal capital. In addition, we see growing earnings from our Essentials business, which allows us to expand our services and solutions beyond rent. When we introduced this business back in 2018, we set a target of $300 million from procurement savings and Essentials revenue. We will hit that target this year with more than $225 million from procurement and $75 million from Essentials.

In light of our success with procurement and the fact that we have embedded this initiative into our platform, we will not provide specific procurement reporting going forward, instead focusing on Essentials. We also have a long development runway of $26 billion, much of which comes from our international opportunity set, positioning us for continued strong value creation well into the future. Lastly, these differentiators are all underpinned by the lowest cost of capital among REITs and unmatched scale that minimizes operating costs. In closing, while 2021 was a year of many records, the bulk of the benefit from the current environment will be realized in the future, providing a clear tangible runway for sector-leading growth for many years to come.

We are confident our best years are still ahead of us. With that, I'll turn the call back to the operator for your questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of John Kim with BMO Capital Markets.

John Kim -- BMO Capital Markets -- Analyst

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

Hamid Moghadam -- Chairman and Chief Executive Officer

Yes. So the answer to your question is yes. We have not included the forecasted rents. So we underwrite based on what we see currently.

In this environment, where we're seeing returns compress, you should expect to see some compression in the development yield. Now mix also has a lot to do with that. And that's something we can check out and maybe get back to you guys on the call about.

Tom Olinger -- Chief Financial Officer

In terms of cap rate trends, I don't think you want to pay any attention to our forecast since we've been consistently wrong for the last five years.

Operator

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

Manny Korchman -- Citi -- Analyst

Hey. Hi. good morning. In terms of your ramping start guidance and commentary from lots of other competitors in the logistics space, when should people start worrying about the amount of supply coming? And maybe an easy way to answer that is how much of your starts are preleased? Or do you expect to get to preleased over the next couple of months and sort of assuage that supply issue?

Hamid Moghadam -- Chairman and Chief Executive Officer

Well, I'll start, and Chris will have some data for you too, Manny. I think every year, we all forecasted supply exceeding demand, and we yet have to see that happen after the global financial crisis. It will happen in some year. I just don't know whether it's this coming year or some other year.

But I've never seen 70% pre-leasing in 40 years of doing this in the development portfolio. And also, the interest in build-to-suits, I think, is a pretty good indication that the product just isn't there. And I'm willing to bet this is counterfactual. But I'm willing to bet if there were more supply, there would be more absorption and more demand.

People simply cannot get the space that they need. But I think it will be several years. And the other thing you need to pay attention to is that overall supply numbers are interesting, but our portfolio is very differentiated in terms of the markets, high barrier markets that our portfolio lives in. And let's not forget about overseas because the dynamics overseas in terms of supply are very different than they are in the U.S.

So I think it's a complicated soup. I'm not trying to avoid your answer, but that's not on the first page of my worry list. It will be at some point, but it's not this year, and I don't think it's going to be next year. Chris?

Chris Caton -- Senior Vice President for Research

Yes. Sure, Manny. So the numbers for this year look very strong market environment, 375 million to 400 million square feet of both delivery and net absorption in our 30 markets that will leave the market vacancy rate at an ultra-low all-time record, 3.4%, 3.5% vacancy. So very low.

Now this is especially true in our U.S. global markets, where we have an overweight strategy. In those markets, the under construction pipeline is just 3% of stock and is 70% pre-leased. 2021 net absorption, so demand was 14% higher than that under construction pipeline.

Now by comparison, our regional markets have 4.8% of their markets under construction. So our global markets are 180 basis points better. 2021 demand, that net absorption was 12% below this under-construction pipeline in the regional markets. So our global markets are 25% better.

Operator

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

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for that color. Just as you think about when supply chain -- well, the first question, how much longer before you think supply chains do start to smooth out? But I guess, even more importantly, because that's probably impossible to pick a date, what does warehouse demand look like when supply chains do smooth out? So of the type of demand that Tom outlined, the different categories of demand, when supply chains smooth out, how much of that goes away?

Hamid Moghadam -- Chairman and Chief Executive Officer

OK. I think Tom answered your second question, but let me take another stab at it. We know, this is a fact. It's not opinion, that the inventory levels in terms of inventory to sales ratios are 10 points below what they were prior to the pandemic.

And the reason for that is that people are sitting at home and the goods economy has been on fire and people are buying a lot of stuff and not spending as much money on experience, etc. So that dynamic will change. But regardless, that 10%, will have to snap back to a normal level, and that's a source for demand. In addition to that, as we outlined in the paper that we put out almost one and a half years ago now, we believe at that time, we thought 5% to 10%.

Today, we would say 10% to 15% more demand, in other words, higher inventory to sales ratio than normal or pre-pandemic because of the need for resilience. And where does that number come from? It comes from all the customers that we talk to every day. So between where we are now and where we think we're going to end up being, there is a 20% to 25% swing in inventories. That is huge.

And it is not driven by the fact that there's a bunch of inventory sitting around, certainly not in the U.S. and maybe sitting around in some plants somewhere. But in the U.S., there's no inventory around for it to go away. That's the problem.

And that's what's creating the supply chain problem. Now there were a lot of people smarter than me who predicted that the supply chain problems would have been over by Christmas or after Christmas. That is not the case. All they're doing is they're parking the ships further into the Pacific so that the visual is not as concerning, if you will, as it would have been, too many 60-minute stories on that, that concern the politicians.

But that's not the only indication of a supply chain problem. I mean you could have a product that has 50 different parts going into it, and until the last part gets there, you can't ship that product. So that's a supply chain problem. The fact that you can't get truckers to pick up the goods from ports or transport them from point A to point B, that's a supply chain problem.

I think all of those things are going to take multiple years to resolve themselves. So I think we're going to be in this mode for a while.

Operator

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

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hi everyone. Tom, I kind of want to go back to your commentary. I know you guys traditionally said 8% to 9% FFO growth, ex promotes. The CAGR since the Investor Day has been 13%.

And I believe you guys are already kind of at 10% with initial guidance here. I mean, in this part of the cycle where market rent growth continues to be underestimated, your mark-to-market grows, you're unleashing a little bit of the balance sheet with higher leverage here in that 2.5 million of uses here. Kind of how should we think about maybe this point in the cycle trend until we get an inflection? And how long could that last?

Tom Olinger -- Chief Financial Officer

Craig, so I think you're asking what's 8% to 9%, if it was 8% to 9% back in '19, has that changed today. And yes, it's changed. And I think for several reasons, and it gets back to the differentiators I talked about in my script, but I'll start with same store. My memory is that the same store embedded in that Investor Day was 3.5% to 4.5%.

And that has...

Hamid Moghadam -- Chairman and Chief Executive Officer

It was actually 3% growth in market rents on top of the mark-to-market that existed there. And I don't remember what that was. It was in the teens certainly.

Tom Olinger -- Chief Financial Officer

Yes. Our new methodology, I think that we were about 18%, give or take. Today, we're at 36%, so almost double, right? So you can think about that in place to market alone is going to ratchet up our same-store growth by more than 100 basis points, up to 150 basis points. So you can think about that level of same-store for several years because that 36% in place to market growth is an average.

So think about what it's going to be over the next year or two. Should be higher, right, because you're going to be rolling leases higher. And that 36% is not stopping. If you look at our guidance, right, for rent growth for the year and rent change, I would expect to see that in place to market build by the time we get to end of 2022, I think it's going to cross the 40% mark.

So that same-store is going to continue to grow, and it's not a one- or two-year story, it's two-, three-, four-, five-year story. And again, that's with market rents not growing the 36%. That's number one. Second would be think about our strategic capital business, how we are scaling in that business, how our fees are growing without promotes, right? We saw asset values increase 39% overall for the year.

Well, guess what, that increases asset values in our funds and our asset management fees increase as well. So that business is continuing to scale and contribute. And then when you look at our Essentials business, we talked at Investor Day about that business adding 50 basis points of growth, kind of $0.02. I think we're going to be well ahead of that.

So I could go on with differentiators, but that 8% to 9%, the new normal is, I think, what you're staring down with our core results this year.

Hamid Moghadam -- Chairman and Chief Executive Officer

Craig, let me add two things to what Tom said, all of which I agree with. Number one, you actually got our same-store right, better than most people, including us. So congratulations on that for the past. But going forward, look, the market is really good and all kinds of different portfolios regardless of their strategies will do well in an environment where rents are going up and cap rates are compressing.

But we are thinking way beyond that. I mean, Tom mentioned Essentials, we have significant expectations for that business. Looking at our labor CWI business, we did it as a service to customers, but it's quickly turning into a potential profit center. We have now put together a group to invest into EV charging.

And we have actually committed to our first project in Southern California for EV charging on trucks. The ROIs on that business are off the charts. And by the way, I could go on for another 20 minutes talking about the stuff that's in the pipeline. So we're not sitting and just praying for the real estate aspects of our business.

The most valuable aspect of our business is the 1 billion square feet of customers that we serve that are in need of lots of other things. So we're really excited about the long-term prospects. We didn't have that in 2019. Those things were a glimmer in our eye.

Now their real businesses producing real bottom line. So that's why I'm pretty optimistic about the future going forward. And remember, all of that is being done with sub-20% leverage. And external growth, yes, we have more external growth than anybody.

But in relation to the size of our portfolio, external growth is almost an afterthought. We don't need to depend on that. In my opinion, lower quality source of growth because you're just arbitraging external capital to the internal cost of capital. Ours is organic.

So really, really not only feel good about the level of growth going forward, but also the quality of that growth.

Operator

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

Ron Kamdem -- Morgan Stanley -- Analyst

Thanks so much for the time. Congrats on the quarter. Just thinking about the same-store NOI guidance for '22, any more color on maybe the U.S. versus Europe? And maybe can you compare and contrast how you expect sort of growth for next year in the two regions?

Tom Olinger -- Chief Financial Officer

Yes. I'll throw in some thoughts on rent growth. Rent growth in Europe is catching up to the U.S. And we've seen this play out in the past.

And frankly, it's catching up slower than we expected because vacancy rates across Europe have been lower than the U.S., but that's taking place now. And Chris, you ought to pile in here, this year, we'll see European rent growth, I think, will exceed that U.S.

Chris Caton -- Senior Vice President for Research

Indeed, the vacancy rates are lower and the rent growth is accelerating. So it's an interesting point in time in the European markets.

Operator

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

Jon Petersen -- Jefferies -- Analyst

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

Tom Olinger -- Chief Financial Officer

The vast majority of it does come into the REIT itself versus the taxable REIT subsidiary. When you think just about dividends, as we've talked about in the past, we have an extremely low payout ratio, 60%-ish is what we've been averaging and similar to what I would expect for 2022. And we're paying out the minimum required. So you should think about our dividend having to grow in line with our underlying earnings.

So when you see earnings growing at 22%, those promotes are landing in the OP in our REIT and needs to be reflected in our dividend accordingly.

Operator

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

Nick Yulico -- Scotiabank -- Analyst

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

Tom Olinger -- Chief Financial Officer

Sure, Nick. So I'll preface it by there are several factors that go into the promote, not just real estate valuation, there's FX considerations because it's a euro-denominated fund. But that fund also has functional currencies, not in euro, British pound, for example, right? So there's FX activity going on functional and transitional. Second would be there's debt mark-to-market in there.

So a long-winded way of saying that there are a lot of factors that impact it. From a valuation standpoint, we think there's some modest mid-single-digit valuation increase embedded in there. We're taking our best shot at where it's going to land. A lot of variables can impact it, and we're going to update you accordingly as those move around, particularly given how once the promote exceeds that top hurdle, you can have a lot of variability in either direction just depending on how things go.

So the funds based on third-party appraisals, they're going to be what they're going to be. Interest rates are going to be what they're going to be. FX rates are going to be what they're going to be. We've taken our best shot at estimating those impacts, and we'll keep you posted.

Hamid Moghadam -- Chairman and Chief Executive Officer

Yes. The other thing I would add to that is that we're not assuming cap rate compression. And based on today's values, I would say there's appraisal lag built into some of these valuations because the appraisers have a hard time keeping up with comps, even today, the market has been so fast moving. So I think there are a couple of layers of protection built in that.

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

Operator

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

Anthony Powell -- Barclays -- Analyst

Hi. Good morning. Just a follow-up on the promote question. Thanks for the color on 2023 promote.

How should we look at this stream of income over the next few years? And should we be valuing promote at a higher multiple than historical, given increasingly recurring nature and the growth of the valuation of the portfolio?

Hamid Moghadam -- Chairman and Chief Executive Officer

Let me take a stab at this. The issue with our promotes is this. We have two huge open-ended funds that are promotable. And those are on three years promote cycles.

So '22 and '23, our big promote year is just like '19 and '20 were, except more so. So the third year, we have some small funds in that year. This year, for example, is that third year, which is relatively thin. This past year, we had UKLV in there.

So we have some smaller funds in there. Those funds over time will grow. So this promote picture would become more even. We've also gone through a modernization of our funds terms.

And given the investors the option of basically extending the promotable period to the lean years and also new capital coming in is going to have its promote tied to the year that the capital came in as opposed to a set year. So over time, you're going to see these promotes smooth out. It will take some years for them to be perfectly smooth. So the way I would think about it is look at the promotes over a three-year cycle and average them.

And I think the guidance that Tom talked about for this year, 2022, is actually not a bad number as sort of thinking about roughly that average over a three-year period. And as to the valuation of that, look, you guys can do that better than us, but we're not getting anything for that, and we should get something. So because the history is there, you can go back and look at it for 10 years under the new Prologis, 11 years, and assume something as a percentage of AUM. Historically, I've always used 25 basis points kind of in my head of promotable AUM, with 60% of that going to the bottom line because of our participation programs.

So that's the way I think about it in a normalized year, but I think it's going to be much higher than that in this cycle.

Tom Olinger -- Chief Financial Officer

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

Operator

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

Blaine Heck -- Wells Fargo Securities -- Analyst

Thanks. I wanted to touch on acquisitions quickly. It looks like you guys came in light this quarter relative to guidance. And I know acquisitions are certainly tougher to forecast than what you're going to be able to do on the development side or even on the disposition side.

But wanted to get your thoughts on the acquisition market in general, whether the shortfall this quarter was driven by pricing or anything else specifically. And then any broader commentary regarding your level of interest, especially in large acquisitions in 2022 would be very helpful.

Tom Olinger -- Chief Financial Officer

Yes. There was nothing in the quarterly results as indicative of more or less interest. And as you see quarter-to-quarter, these numbers move around quite a bit. We are always in the market.

We look at all the deals, big, small portfolios, etc. And prices have been moving up. Obviously, there are competitive situations. But I think we're disciplined, like we always have been, with acquisitions.

But we got great teams, and we're on every deal.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Yes. Thanks. Can you provide some color on your underwritten development margins? It looks like the margins in the 4Q '21 and 2021 starts is below the in-place pipeline and the recently stabilized assets. Is there something there that's driving those lower? Or is it just conservative estimates?

Hamid Moghadam -- Chairman and Chief Executive Officer

Well, our margins on starts have historically always been projected to be lower than our actual margins with completion because we don't count on things like super rent growth. And as we talked about earlier or cap rate compression or all those other things that have happened. And obviously, over time, we're using up the cheapest land and buying more and more of our landed margin. The kind of margins we've had in the last couple of years have been just unprecedented.

So over time, you should expect those kinds of margins to glide to a more normalized level as cap rate compression slows down and rental growth eventually will slow down. Can't keep going at thinking of 20% a year. So that is not at all unusual. There's nothing specific going on that other than mix where in some years, we're developing more here and there, and they're different.

And our land bank has different ages in different jurisdictions. So some things has a little bit to do with it, but the general trend has been much higher than a cross cycle kind of margins that we would expect to see.

Operator

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

Dave Rodgers -- Baird -- Analyst

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

Hamid Moghadam -- Chairman and Chief Executive Officer

Labor is getting worse. Labor has been getting worse actually for 10 years and the pandemic only just made it worse faster. I think that is forcing our customers into deploying more automation because they have to, to get their work done. That requires a lot of capital that many of our customers don't have.

So that's a business opportunity for Prologis, is to invest in innovation and robotics and all kinds of other automation issues that help with the labor problem. Also CWI is a major step that we've taken in that regard. But I will tell you this, that more of that technology is deployed in our buildings, the stickier the tenants become and probably they determine the lease will increase and turnover costs will go down. So I think it's good for us long term.

But I don't think this labor problem is going to get solved. And it's particularly acute in the U.S. It exists in other parts of the world, but it's particularly acute in the U.S. And there are lots of theories as to the reasons for it, but I'm not smart enough to know which ones make sense and which ones don't.

Operator

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

Tom Catherwood -- BTIG -- Analyst

Thank you. Good morning everybody. Tom, going back to something you mentioned in your opening remarks, you were talking about the $26 billion build-out potential on your land bank, and you mentioned that it's underpinned by an international opportunity set. Developments obviously jumped in 2021, but they seem to be weighted more toward the U.S.

than they were in 2019 and 2020. Is the expectation that Europe could account for a larger percent of the 2022 starts? Or is the opportunity set you were talking about kind of in other geographies?

Tom Olinger -- Chief Financial Officer

Yes. So if you look at the composition of the land bank, our option land and covered land plays, so this is almost 200 million square feet of build out opportunity. It's about two-thirds in the Americas and one-third outside of the Americas. So that's the balance.

And the cadence at which we take it down will be opportunity driven.

Hamid Moghadam -- Chairman and Chief Executive Officer

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

Operator

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

Vince Tibone -- Green Street Advisors -- Analyst

Hi. Good morning. I want to follow up on the lease mark-to-market. Could you share the estimated mark-to-market on a cash basis? And also share the typical annual escalators you are getting on leases today.

Tom Olinger -- Chief Financial Officer

Yes. On the cash in place to market today is right around 30%. And from an escalator standpoint, I think what we're seeing today with escalators would clearly be in the 3s. And in certain markets, it's in the 4s and potentially even higher.

So when we think about all this, escalators are certainly important. But at the end of the day, our teams are trying to drive the highest cash flows at the end of that lease. Bumps are a part of that. Starting rents are a part of that.

TIs are a part of that, right? It all goes into the mix. And so while it's important to look at bumps, it's not necessarily the sole determinant of the economics you're driving out of leases.

Hamid Moghadam -- Chairman and Chief Executive Officer

We are NPV investors on leasing. And the profile of it is usually our flexibility to deal with the tenants' preferences actually allows us to extract a higher NPV.

Operator

Your next question comes from the line of Mike Mueller with JPMorgan. Your line is open.

Mike Mueller -- JPMorgan Chase and Company -- Analyst

Yes. Hi. I'm wondering, is there a big difference today in terms of the margins you're expecting on build-to-suits versus spec developments?

Tom Olinger -- Chief Financial Officer

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

Obviously, the outcomes have changed because the margins are much, much higher.

Operator

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

Steve Sakwa -- Evercore ISI -- Analyst

Yes. Thank you. I had just a question on development costs. What sort of inflation trends are you seeing kind of starting this year? How did that compare to '21? And what sort of bottlenecks or issues are you seeing kind of in your own supply chain, getting all the stuff you need to kind of build everything you want to build this year?

Tom Olinger -- Chief Financial Officer

Yes, Steve. So in the U.S., in 2021, there are total shell construction cost increases of about 31%, and that's on a marketwide basis. We were able to mitigate about 7% of that increase or seven percentage points of the increase. So our net increase that we absorbed last year was 24%.

So we feel like most of that is a competitive advantage against our competitors. And there's a lot behind this in terms of what do we see for this year. Tough to say how that plays out. But our teams are considering a 10% to 12% additional shell construction increase for '22.

Hamid Moghadam -- Chairman and Chief Executive Officer

By the way, let me tie that to some of the earlier questions. When you're getting this kind of escalation on replacement costs and by the way, I would say land prices have gone up even at a higher rate than that, it's nice to own already 1 billion square feet of this kind of real estate. So particularly all the other people trying to get into the same business, driving down cap rates at the same time that replacement cost rents are going up is a nice place to be. That is not brilliance, that's just dumb luck.

Operator

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

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi there. I guess just considering your expectations for '22 and the guidance you've laid out, can you give any details on what portion is already known, like, for example, leases signed in '21 that will commence in '22? You already know that timing and rate. But for the parts that you don't already know, like lease commitments in the second half or pace of development stabilization, what sort of assumptions are you making? Is it that the strength of '21 stays the same, improves further or slows? And kind of what's driving that?

Hamid Moghadam -- Chairman and Chief Executive Officer

I would say, Caitlin, there are very few things that haven't happened already that will affect 2022, one way or another. Because even if we get a wrong on rental change on one side or the other, we put away so many of our rollovers already for 2022 that there isn't that much opportunity on the margin to sort of affect that in a big way. So there's 6% leasing, basically remaining to be done. And that's going to happen on average in the middle of the year.

So that's really 3% of our 97%. It's just not going to move the numbers around that much. And obviously, development stabilizations and all that are more of a future year type of thing. Again, they occurred during the year.

So I would say our volatility in the short term, meaning this year, is going to be relatively modest. And you can take that answer to the bank pretty much at any year at this time.

Tom Olinger -- Chief Financial Officer

And then I'd go back just to the in-place to market that $1.2 billion of NOI that we will capture with no market rent growth, that gives you a high level of certainty regarding the same-store growth going forward. So if the things you need to think about is if rent growth outperforms in 2022, that's going to take that $1.2 billion up. I mentioned, I think that 36% in place to market today is going to cross 40% by the time we get to the end of the year. It's that sort of predictability, I believe, that underpins our confidence of why our growth will continue to be sector-leading for many years to come.

Operator

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

Derek Johnston -- Deutsche Bank -- Analyst

Hi. Thank you. Are rising rents and revenue growth still handily outpacing the supply chain and efficiencies, inflation and really overall expense growth? How do you view rents versus linked expenses playing out in 2022?

Hamid Moghadam -- Chairman and Chief Executive Officer

I'm not sure I understand the question completely. Expenses are obviously going up as well, but they're going up more sort of in line with general inflation and real estate rent inflation in logistics has been certainly higher than that, if you want to describe it as inflation. The other thing is that in terms of overall logistic cost, rents, even with the recent escalation, are 3%, 4% of the total picture. So cost of drivers, cost of fuel, cost of transportation, all of those things are much bigger factors in terms of our customers' cost structure.

So there is not as much sensitivity to the real estate cost, if there is a commensurate increase in productivity that comes along with that. I think that's what you asked. But we'll give you an opportunity to clarify here if that's not what you asked.

Derek Johnston -- Deutsche Bank -- Analyst

Thank you.

Hamid Moghadam -- Chairman and Chief Executive Officer

OK. Thanks.

Operator

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

Michael Bilerman -- Citi -- Analyst

Good. It's Michael Bilerman. Hamid, I wanted to come back. You gave an answer where you said you're not going to predict cap rate trends because you've been consistently wrong the last five years.

And I want to sort of dive into sort of the components that made you wrong over the last five years. I get rents has eased up dramatically and NOI is so important as a numerator. But the denominator, the cap rate really does impact your capital allocation decisions, what to buy, what to sell, what to develop, how you raise capital on the balance sheet and all those sort of inputs. So I guess, how are you thinking about it going forward? You must have a view.

And so I'm just trying to understand maybe some of the components that made you wrong over the last five years and how that informs your decision going forward.

Hamid Moghadam -- Chairman and Chief Executive Officer

Look, we've taken our best shot and we do have a view on these things. After all, we give you guidance and we've done that for 25 years. So we do have a view. And our view has always been -- not always, but in the last 10 years, as far as I remember, is that most of us in this room sort of grew up in the '80s and '90s and cap rates were 9% and 10% for logistics in those days.

So as the cap rates have marched down in the last 20 years to where they are today, I don't know, 3% to 4%, we are anchored in the past. So it always feels like it's a little expensive and all that. But there are a couple of things that have changed. First of all, general interest rates and all that have driven capital market returns down for everything, stocks, bonds, everything, including real estate.

But I think there has been a better appreciation of logistics real estate as an asset class that has caused logistic cap rates to compress further than maybe some other property tax that have compressed less or in more recent years, gone the other way. I don't see anything stopping that part of it. So your guess is as good as mine and with respect to long-term interest rates and their direction. But I can tell you, the weight of the money is accelerating.

It's not slowing down. The other thing is that I think if you're uncertain about the inflation outlook, which is what a lot of the discussion is, is it inflation, is it supply chain, is it short term, is it long term, not a bad thing to own modestly leveraged real estate in an asset class that's in the equilibrium, actually better than equilibrium, a couple of hundred basis points tighter than equilibrium, when you have replacement costs that give you that buffer. So we have the buffer of the mark-to-market in the 30% range that Tom talked about. But we also have the buffer of replacement costs going up, which Gene talked about.

That's just the future buffer that we haven't started talking about yet. So I think rental score, consistently in our company, low on rental projections, but higher than all my colleagues. Low compared to what actually happened, but higher than all my colleagues. And I expect that to continue for some time.

But I think it's imprudent in a year where you've had this kind of spectacular rental growth to go out there and project 10 more years of that. And so we run our business assuming more modest, sort of more closer to trend line type of dynamics. And if it works out better than that, we'll report it to you every quarter. So we try to get it as close to the pin.

And as the pin moves, we'll move. So I don't know if that's an answer to your question or not. One other thing I would tell you, is this the last question? Yes, you were the last question. So maybe this is a wrap up.

Look, as you think about our company, it's really important to get cap rates right, really important, at least in the long term to get rental growth and all those things right. And we will outcompete on those bases all day long. But this company is increasingly becoming a multiple product line cash flow generating type of business. Tom mentioned $1 billion coming out of our private capital franchise, with essentially no capital because our capital is our co-investment, which is in the rent business.

So the Essentials business, we sort of glossed over it, but it's a $75 million a year business now. It can be a $1 billion business. The EV business can be a $1 billion business. I'm not saying that it is or whether it's going to happen in two years.

But increasingly, we're building these cash flows on top of the base real estate business because eventually, the real estate business will slow down. But the ability to do business with those customers that use our real estate, I think, is a runway for us for multiple decades. So that's what's really exciting about where we are today. Thank you for your interest in our company, and we look forward to talking to you soon.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Jill Sawyer -- Vice President of Investor Relations

Tom Olinger -- Chief Financial Officer

John Kim -- BMO Capital Markets -- Analyst

Hamid Moghadam -- Chairman and Chief Executive Officer

Manny Korchman -- Citi -- Analyst

Chris Caton -- Senior Vice President for Research

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Ron Kamdem -- Morgan Stanley -- Analyst

Jon Petersen -- Jefferies -- Analyst

Nick Yulico -- Scotiabank -- Analyst

Anthony Powell -- Barclays -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Dave Rodgers -- Baird -- Analyst

Tom Catherwood -- BTIG -- Analyst

Vince Tibone -- Green Street Advisors -- Analyst

Mike Mueller -- JPMorgan Chase and Company -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Caitlin Burrows -- Goldman Sachs -- Analyst

Derek Johnston -- Deutsche Bank -- Analyst

Michael Bilerman -- Citi -- Analyst

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