Prologis, Inc. (NYSE: PLD) Q2 2021 earnings call dated Jul. 19, 2021
Corporate Participants:
Tracy A. Ward — Senior Vice President, Investor Relations
Thomas S. Olinger — Chief Financial Officer
Chris Caton — Managing Director, Global Strategy and Analytics
Eugene F. Reilly — Chief Investment Officer
Michael S. Curless — Chief Customer Officer
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Analysts:
Steve Sakwa — Evercore ISI — Analyst
Emmanuel Korchman — Citi — Analyst
Caitlin Burrows — Goldman Sachs & Co. — Analyst
Craig Mailman — KeyBanc Capital Markets — Analyst
Vikram Malhotra — Morgan Stanley — Analyst
James Feldman — Bank of America Merrill Lynch — Analyst
John Kim — BMO — Analyst
Jonathon Petersen — Jefferies — Analyst
Blaine Heck — Wells Fargo — Analyst
Michael Carroll — RBC Capital Markets — Analyst
Michael Mueller — J.P. Morgan — Analyst
David B. Rodgers — Robert W. Baird — Analyst
Vince Tibone — Green Street — Analyst
Rob Simone — Hedgeye Risk Management — Analyst
Thomas Catherwood — BTIG — Analyst
Ki Bin Kim — Truist — Analyst
Presentation:
Operator
Good morning, and thank you for standing by. Welcome to the Prologis Second Quarter 2021 Earnings Conference Call. [Operator Instructions]
It is now my pleasure to hand the conference over to Senior Vice President of Investor Relations, Tracy Ward. Tracy, I hand it to you.
Tracy A. Ward — Senior Vice President, Investor Relations
Thanks, Sally, and good morning, everyone. Welcome to our second quarter 2021 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations.
I’d like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our second 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 McEwan are also here with us today.
With that, I’ll turn the call over to Tom. Tom, will you please begin?
Thomas S. Olinger — Chief Financial Officer
Thank you, Tracy. Good morning, everyone, and thank you for joining our call today. The second quarter exceeded our expectations, both in terms of our results and outlook for 2021 and beyond. With our exceptional portfolio and team, we set high watermarks across several measures this quarter. Demand for space is robust and diverse and market conditions remain the healthiest in our 38-year history.
In the second quarter, lease signings were 64 million square feet and lease proposals were 84 million square feet, both remained above average and were driven by new and development leasing. Likewise, at the largest IBI Customer Activity Index reached a new high in the second quarter, and early indicator of strong future demand. Our leasing mix is broad. Currently, the greatest demand is for spaces above 100,000 square feet. For smaller spaces, activity is picking up. We signed 518 leases totaling 18 million square feet in the quarter, the highest volume in this segment in three years.
For customer segments, e-commerce continues to lead the way, representing 30% of new lease signings in the second quarter. While Amazon remains steady at 6% of total new leasing, we have seen many mortgage commerce players come to the table. For example, we signed 168 new e-commerce leases in the first half of 2021 versus 53 in the first half of last year.
Supply chains are racing, beginning to restart. And as they do, it will create more demand going forward. Containerized imports are up 33% through May versus pre-pandemic levels as retailers replenish their supply chains. While inventories have risen 3% from their trough, they have struggled to grow this year as retail sales are up 19% from pre-pandemic levels. We see the current low level of inventories in our space utilization, which at 84.3% is below the long-term average of 85%. This is yet another sign that our customers are operating with sub-optimal levels of inventory.
Putting together recent outperformance and ongoing momentum, we are raising our 2021 U.S. forecast for net absorption by 20% to 360 million square feet and deliveries by 8% to 325 million square feet. Looking forward, we foresee continued supply balanced by demand with historic low vacancy of 4.5% carrying into 2022.
With balanced demand and supply, acute scarcity in our markets is driving the record rent and value growth. Our operating portfolio lease percentage rose by 80 basis points to 97.2% at quarter end. Customers continue to compete for space and are making decisions faster with lease gestation in the quarter of just 44 days. When we look at the factors impacting supply, significant barriers exist in our markets and include a lack of buyable land, increasingly difficult and expensive permitting and entitlement processes and rapidly escalating replacement costs. Our research team released an excellent paper on this last month, which you can find on our website.
Our supply watchlist remains quite small. We reviewed Houston in the quarter, leaving just Spain and Poland. Accelerating demand in the quarter combined with ultra-low vacancies translated to a very strong rent growth of 4.1% in our U.S. markets, exceeding our expectations. As a result, we are raising our 2021 rent forecast an all time high of 10.3% for the U.S., up approximately 40 basis points from our prior estimate and 8% globally, which is up 300 basis points. Our in-place to market rent spread is now the widest in our history at 16.9%, up 330 basis points sequentially. This represents future gas in the tank of nearly $700 million in NOI or $0.90 per share.
Turning to valuations. Our assets have strongest quarterly uplift in our history, rising 8% in the second quarter alone with the U.S. up more than 10% and Europe up 5.6%. On the topic of valuation, I want to point out that we enhanced the NAV disclosure in our supplemental related to property management fees. Given the size and scale of our portfolio, we created substantial value through our operational advantages. As a result, we know the real estate is worth more in our hands. Accordingly, we are now including net property management fee income as the bone in the adjusted NOI in our NAV disclosure.
Switching gears to results for the quarter, our team and portfolio continued to deliver excellent financial results. Core FFO was $1.01 per share with net promote earnings effectively zero, rent change on rollover was 32%. Occupancy at quarter end was 96.8%, up 110 basis points sequentially. Cash same-store NOI growth accelerated by 5.8%, up 290 basis points year-over-year.
We tapped into favorable market conditions and disposed off $880 million of non-strategic assets across our portfolio. In addition, just last week, we completed the sale of a $920 million owned and managed portfolio including all of the non-strategic IPT assets. It’s worth noting that to date we have sold $2 billion of non-strategic assets from our IPT and LPT acquisitions by pricing more than 23% above underwriting.
Turning to strategic capital. Our team raised almost $600 million in the second quarter. Equity cues from our open-ended vehicles [Indecipherable] $3.3 billion at quarter end, hitting another all-time high. Robust investor interest has prompted private equity limited partners to shift away from diversified to more sector specific funds, particularly for the logistics sector. In light of recent asset management transactions and public comps, the value being ascribed to our strategic capital business is legally understated. For the balance sheet, we continue to maintain excellent financial strength with liquidity and combined leverage capacity between Prologis and our open-ended vehicles totaling $14 billion.
Moving to guidance for 2021. Our outlook is further improved given higher rent growth, higher valuations and robust demand. Here are the key updates on an our share basis. We’re increasing our cash same-store NOI growth midpoint by 75 basis points to now range between 5.25% and 5.75%. We expect bad debt expense to be approximately 10 basis points of gross revenues, down from our prior guidance midpoint of 20 basis points and well below our historical average.
We are increasing the midpoint for strategic capital revenue, excluding promotes, to $470 million, up $15 million from prior guidance. This upward revision is due to increased asset management fees resulting from higher property values. Faster development lease-up and higher asset values are also leading to an increase in promotes. We now expect net promote income of $0.02 for this year, an increase of $0.04 from our prior guidance. We’re also increasing development starts by $300 million and now expect a midpoint of $3.2 billion. Build-to-suits will comprise more than 40% of development volume.
Our owned and managed land portfolios compose of land, options and covered land place supports $18 billion of future development over the next several years. We are also increasing the midpoint for dispositions and contributions by $650 million in total. This increase will have roughly a $0.02 drag on earnings this year given the timing to redeploy incremental proceeds. We now expect to generate net deployment sources of $200 million at the midpoint with leverage remaining effectively flat in 2021.
Taking into assumption there is no account, we’re increasing our core FFO midpoint by $0.07 and narrowing the range to $4.04 to $4.08 per share. Core FFO excluding promotes will range between $4.02 and $4.06 per share, representing year-over-year growth at the midpoint of almost 13%. We continue to maintain exceptional dividend coverage, and our 2021 guidance implies a payout ratio in the low-60% range and free cash flow after dividends of $1.3 billion.
In closing, the first half of the year has been extraordinary and our outlook is equally promising. Visibility into our strong future organic earnings potential is very clear. We have a significant embedded in place to market rent spread, the development ready land portfolio, substantial balance sheet capacity and ability to create value for our customers beyond the real estate.
With that, I’ll turn it back to Holly for your questions.
Questions and Answers:
Operator
[Operator Instructions] And our first question is going to come from the line of Steve Sakwa, Evercore ISI.
Steve Sakwa — Evercore ISI — Analyst
Thanks. Good morning out there. Maybe Tom or Hamid, I was just wondering if you could spend a little more time just talking about some of the demand drivers across some of the various sub-sectors and maybe regionally. I know Europe maybe grew a little bit faster, but maybe just provide a little more context around which businesses and which regions you’re seeing the most demand?
Chris Caton — Managing Director, Global Strategy and Analytics
Hey, Steve, it’s Chris Caton. I’m going to jump in with a few highlights and then I think Gene will share some color. I think there are three or four demand trends that are presenting themselves. The first is broadly the diversification of e-commerce. So internationalization of the major players for smaller mid-sized players stepping up. The second is the growth leaders of last year in leasing space; think not food companies, pharmaceuticals and durable goods companies. The third trend would be supply chain resilience. For example, we see the core markets are among the strongest they’ve ever been. So you have several clear themes playing through demand.
Eugene F. Reilly — Chief Investment Officer
Yeah. So Steve, the only thing I’d add to that, if you want to get some geographic color is coastal markets are definitely doing better. You look at the U.S., Southern California and New Jersey by far I think have the strongest demand and dynamics. But it also say that it’s very difficult to find a weak market globally, whether you’re in Latin America, Europe, the U.S., there is strength in demand really everywhere.
Operator
Thank you. And our next question is going to come from the line of Emmanuel Korchman with Citi.
Emmanuel Korchman — Citi — Analyst
Hey, good morning, everyone. Chris, maybe just another one for you. You spoke about broad-based demand, but is the specific demand from especially e-commerce customers changing at all? Are they kind of willing to get whatever they can? Are they being more specific as to what they want? Are they pinpointing markets? Is it a wider sort of paintbrush of demand? Can you help us figure out what they’re actually asking for when they come to you?
Chris Caton — Managing Director, Global Strategy and Analytics
Yeah. So the message on e-commerce is actually is very diverse. And I think if you look across the majority of different organizations, they all want something slightly different. So if you have a large international player, I do think they’re getting much more pinpointed. We’ve seen a lot of growth, for example, in the last touched submarkets. There is a lot of focus on shortening of delivery times. But more mid-sized organizations might be in adjacent location or in a regional location to still build out the basic infrastructure for executing online.
Operator
And our next question is going to come from the line of Caitlin Burrows with Goldman Sachs.
Caitlin Burrows — Goldman Sachs & Co. — Analyst
Hi, good morning, team. I was just wondering if you could talk maybe about development. Prologis is obviously enacted developer. You increased your guidance for development starts and stabilizations and also the contribution. So could you give some detail on how you think about your development businesses’ valuation? How the development gains are related to that and how it might be different than peers’ activity? I know that’s a lot.
Thomas S. Olinger — Chief Financial Officer
Hey, Caitlin. Thanks for your question. This is Tom. I’ll take a first shot at that. I think there are several aspects of our development business that are quite unique. The first, I would just think looking at the size of that portfolio, $18 billion of build out, almost 20% of our market cap and that portfolio is very focused in high barrier markets in which we operate. So we’ve got a land bank that we can build out, a very, very high quality portfolio that’s in high demand.
It’s very diversified across 19 different countries and it’s a huge opportunity set that our development platform has to build out just having the menu to seek the best returns and to solve customers’ problems across all of those different markets. There’s a huge advantage. And I think that leads to just the durability of those development gains. So if you look at our track record, we’ve got a track record of 20 years developing $37 billion of assets, 20% unlevered IRR and we get those results, thereby externally by adults, by the way. So an incredible track record of durability. So when you look at the $18 billion of build out, our history of being able to continue to develop at very, very attractive rates. There’s a very, very long runway of opportunity that’s just presented in front of us.
And then to your point on unrealized gains, I think that’s another point that makes us quite unique that given our capital structure and how we’re — how we want to structure the vast majority of our assets outside the U.S. are held in funds, but we’re developing the vast majority of those assets on balance sheet; Europe, Japan, Mexico. And those assets with very few exceptions are contributing into our funds. So there is a world crystallization of those gains.
So when you think about the 20% unlevered IRRs, all that development, the vast majority of those gains were realized in cash, and that’s a real cash flow that is part of your AFFO. It should be embedded in your valuation. I think when we look at valuation in particular for development, I think there is a very scattered shot approach because there is a couple of different things you have to do. Obviously, you’ve got the CIP that’s in front of you. You got to finish that and value that. You’ve got your land bank, in our case, $18 billion that you have to value. And there was also residual for this platform. Platform has a history of $37 billion, 20% unlevered IRRs. There is a value here. So I think you can put those all together, there is different ways to do it obviously. But I would just encourage you to take a look. The cash flows that this thing generates historically. And I think you’re going to find the valuation for our development capabilities are, I would say significantly undervalued.
Operator
Thank you. And our next question will come from the line of Craig Mailman with KeyBanc Capital Markets.
Craig Mailman — KeyBanc Capital Markets — Analyst
Hey, everyone. Appreciate the update there and where you think market rent growth is, and clearly your net absorption stats as well. Just looks like we’re still at equilibrium. But I’m just curious, did you guys talk to tenants and kind of continue to push through rents or maybe even accelerate that? How does the conversation changed now with labor shortages continuing and maybe even getting a little bit worst places and just gas prices continue to rise and impacted the transportation side? I mean our rents even how high up on the list are they at this point? Maybe update us on how many deals you’re losing as a result of rent versus other factors? Those are few questions.
Eugene F. Reilly — Chief Investment Officer
Yeah. This is, Gene. So I’ll take that. So I think you’re — if you look at the conversations we’re having with customers and what their pain points are relative — excuse me.
Thomas S. Olinger — Chief Financial Officer
Gene is having a little bit of issue with the access to it. So the conversations are mostly around labor. That is absolutely a pain point. But there is an ability to push through pricing today because when you have retail sales jump 20% from pre-pandemic levels and God knows what percent from pandemic levels, and the supply chain is dry and there is very little probability of losing that piece of business because people are flush with cash and out there spending money. I think this is going to continue for a while. So basically, everybody’s hair is on fire trying to keep up with demand.
And Mike, any additional color on that?
Michael S. Curless — Chief Customer Officer
Yeah. I think one way you can really represent this is the fact that we’ve had more customers competing over space than we’ve seen ever before, and that create some difficult situations so we always start with transparency with both parties. But I’m going to tell you, the rent becomes a very minor discussion, just the availability and accessibility of that space becomes the priority. So I think that’s a good description of what we’re seeing out there in terms of the customers’ priorities.
Thomas S. Olinger — Chief Financial Officer
Craig, I wish we were losing more deals because of rent because we actually look at that on a quarterly basis by geography and the number is under 5%, which to me means we may not be pushing rents enough. So in a way, the fact that we’re not losing those deals to rents may not be such a great thing.
Eugene F. Reilly — Chief Investment Officer
Let me jump in here and continue and my point. With respect to gas prices, that pretty much makes location on the more important. So I think that’s probably a tailwind with respect to rents.
Operator
And our next question is going to come from the line of Vikram Malhotra with Morgan Stanley.
Vikram Malhotra — Morgan Stanley — Analyst
Good morning. Thanks for taking the question. Just maybe wanted to build upon comments around the strategic capital business. You referenced several times the power of the business and potentially being undervalued. I’m assuming that’s on the equity side. As I talk to my colleagues who cover the asset manager, there is clearly different multiples that you use to value some of these larger or asset management platforms. Maybe you can unpack this for us a little bit in terms of the power of the business, the more focused customer base you’re seeing that are focused on logistics-only platforms and then just the valuation that would be really helpful?
Thomas S. Olinger — Chief Financial Officer
Yeah, Vikram, it’s Tom. I’ll take that first. So I think let’s start with that business and how that business has grown. If you look over the last five years, any land and revenues of that business have grown 18%, some 18% CAGR. More importantly, the EBITDA or cash flow that that business is generating has grown by 26% CAGR. So incredible growth. As we look forward, just given what we’re seeing, I think the opportunities are there for very strong continued EBITDA growth. So I think that’s a baseline I would think about there. A highly, highly scalable business for what we do.
Relative to valuation, there have been I think clarity around valuation in this business has never been better because there’s been several transactions that have cleared the market lately and you can certainly look at public comps. I think for us, you need to look at the alternative asset managers at the right place to start. And while there are a lot of different ways, I think analysts and investors are looking at multiple. But when you pour through it all for the alternatives and the comps we’re seeing, you’re going to see multiples in the mid-20s on earnings, and those include promotes. So when you strip out promotes, you’re seeing for the best alternative asset managers a multiple of 30 or higher, and they’re getting an X on promotes.
So yeah, that would tell you our business is, I would say, very undervalued because as you’re thinking about how we compare to them, I think you need to think about the stickiness of our AUM. 90%-plus of our AUM is in long life or perpetual vehicles. We talked about the growth profile that we have. And then clearly, there is incredible investor demand for our product, which is also lining up to support growth. Our equity cue at quarter end was $3.3 billion, an all-time high. So happy to get into more discussions with you all on this going forward. But a lot of good visibility out there on valuation.
Chris Caton — Managing Director, Global Strategy and Analytics
Yeah. I would add two things, which we sort of assume that are important. First, the business’ scale. It’s a $60 billion plus business. I mean that puts us among the top real estate asset managers anywhere by any measure, and we’re focused on one property type. So that’s a pretty significant market share in the most desirable market. So that’s place to the premium. And also, I would say, we have the longest history of actually producing these returns that goes back to AMD’s early days in the mid-80s. So both in terms of longevity, the quality of the income stream, these are not a bunch of closed-end funds that expire, these are, as Tom pointed out, very sticky and long-lived cash flow streams.
I would argue that they have more leverage on the upside than the real estate cash flows that support that business because of the fee and promote structure. So for the life of me, I don’t really understand why they’re being valued the way they are, but we’re going to do a better job of explaining that to people who follow this business because we’re honestly getting a lot of receptivity from those investors that really understand this sector.
Operator
And our next question will come from the line of Jamie Feldman with Bank of America.
James Feldman — Bank of America Merrill Lynch — Analyst
Thank you. Following up to the last question, $14 billion of investment capacity. We’ve seen a good amount of large portfolios trade the last few years, but clearly pricing is getting more and more dear. How should we think about your ability to do large scale transactions to keep growing that business through acquisition?
Thomas S. Olinger — Chief Financial Officer
We do not care one iota about external growth and through M&A. It is — that is no skill of the management team, just multiple conversion and dismiss that fair that our size prevents us from growing fast. I would just invite people to look at the numbers and you can strip out the M&A from that. So M&A is opportunistic, never part of our business plan. And if we never had another dollar of M&A, outplay our growth rate against anybody else’s in any center frankly over time.
Operator
Thank you. And our next question will come from the line of John Kim with BMO Capital Markets.
John Kim — BMO — Analyst
Thank you. Given the increase you’ve had in valuations this quarter, I was wondering if you could provide an updated view on exit cap rates and that spread between exiting going in yields when you and your partners are looking at investment?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Well, historically we pencil in a 50 basis point — used to pencil in a 50 basis point increase in the residual calculation based on our rents projections and the like. But I think 50 basis points when cap rates were 9% was quite a bit. And when the cap rates are in the mid-threes, that’s even a great deal more on a relative basis. So we’re mostly using about a 25% increase in residual calculations 10 years out. But again, we are an infinite life vehicle. When you invest in our REIT, you don’t — we just sell non-strategic assets, we don’t sell our other assets that we like. You look at the dividends or the cash flow that comes off those assets and the growth rate of those assets, that translates into a very nice overall IRR, which is really the fundamental driver of value in our business.
Operator
Thank you. And our next question will come from the line of Jon Petersen with Jefferies.
Jonathon Petersen — Jefferies — Analyst
Great, thanks. You guys in your press release mentioned that cash same-store NOI growth in the international portfolio was higher than the U.S., which I think is kind of a flip from what we’ve seen in recent years. But I look at occupancy, the occupancy is still growing faster in the U.S. So maybe you could just talk about what’s driving that higher international growth?
Eugene F. Reilly — Chief Investment Officer
Yeah. Tom, I’ll take that. I think part of it is driven by strong results in Other Americas and Europe was also strong. I think it’s more a reflection of a easier comp in Q2 of ’20 than everything else. But listen, I think longer term, I mean by and large, particularly in Europe, the cap rates have dropped further in Europe over the last several years. That’s been more of a headwind on rent growth. And I would expect, going forward, we’re going to see whether it’s next year, the year after that, but we’re going to see growth in our international markets to be on par, if not better than our U.S. markets.
Thomas S. Olinger — Chief Financial Officer
Yeah. I would also say that land is very difficult in the U.S., but it’s even more difficult in Europe because the government is a much bigger actor in allocating land out and they really tie it to employment and they’re not wild about logistics. So land supply is just that much more difficult.
Operator
And our next question will come from the line of Blaine Heck with Wells Fargo.
Blaine Heck — Wells Fargo — Analyst
Great, thanks. So we noticed turnover costs on leases ticked up this quarter, and those costs as a percentage of lease value have been trending up over the last four quarters as has free rent. Just given the context of you guys having the highest demand you’ve ever seen, those increase — that increase seems somewhat counter-intuitive. So can you just give some color on what might be driving that increase? And how we should think about those concessions going forward?
Thomas S. Olinger — Chief Financial Officer
Blaine, this is Tom. It’s a good observation. What is driving that over the last four quarters and particularly in the second quarter is higher levels of new leasing. So new leasing in Q2 versus Q1 increased 40% sequentially. And new leases generally come with slightly higher concessions, slightly higher turnover costs as a result, but the key is, we’re looking at long-term economics.
So yeah, there is a little bit of short-term pain with that, but we’re getting in what we believe to be a better cash flow and higher rents. So I think that’s the key. We’re looking at the long-term economics here and we’re building that. I do think — and clearly, over the last four quarters, we’ve seen much higher levels of new leasing than in the past. I think that’s going to moderate a bit going forward. But we’re looking at the long-term end game here. And it’s clearly the right economic decision to make.
Eugene F. Reilly — Chief Investment Officer
Yeah. The other issue you should keep in mind is that we’re pushing rents a lot harder than we were before. So likely to replace existing customers with the most efficient customers that have the highest value chain and the ability to pay. So that reshuffle has been accelerated in the last 12, 24 months.
Operator
And our next question will come from the line of Michael Carroll with RBC Capital Markets.
Michael Carroll — RBC Capital Markets — Analyst
Yeah. I wanted to touch back on the earlier comments regarding the broadening out of tenant interest specifically from e-commerce players, I guess. When you say you’re seeing more demand from the smaller players, are these companies that are looking to in-source their logistics needs versus outsourcing it to 3PLs or did they already have an in-source network and they’re just looking to expand that right now or is a little bit of both?
Michael S. Curless — Chief Customer Officer
Hey, this is Mike. It’s certainly a little bit of both. I think the bigger story here is we get asked a lot of questions about, is it all about Amazon? And while they’ve been very steady and robust in terms of their activity with us this year, with actually plenty of back-end activity coming up in the next couple of quarters. The bigger takeaway is what Tom said in the earnings front end here were the other customers. Last year, we leased about 50 non-Amazon — 50 leases to non-Amazon e-com players. This time fast forward, the number is three times as high, and it’s a wide variety of smaller and larger customers. There is some big brand names in there like walmart.com or MercadoLibre in Latin America, JD.com. But the bigger story is, there’s over 150 of these smaller more diversified players using a combination of in-sourcing and outsourcing. We really like that diversification there. And again, the story is just not all about Amazon.
Thomas S. Olinger — Chief Financial Officer
I think there is a frenzy on playing catch up that that is creating a lot of activity. I mean, I think people if anything the pandemic sort of suggested that they can take business as usual in a very incremental approach with respect to their e-commerce strategy. And now they’re realizing how important it is and they’re just pedal to the metal and that’s showing up in our 3PL leasing logistics as well.
Operator
And our next question will come from the line of Mike Mueller with J.P. Morgan.
Michael Mueller — J.P. Morgan — Analyst
Yeah, hi. Can you talk a little bit about your development margins on spec versus build-to-suit? And do you think we could see the mix, which I think you said is about 40% this year drift down further?
Eugene F. Reilly — Chief Investment Officer
Yeah, Mike, this is Gene. I think that’s going to hold. In fact, I think we might see ultimately a higher build-to-suit percentage. And I’d be careful looking at comparison of margins between build-to-suit and spec because the mix has an awful lot to do with it, how long the transaction has taken to negotiate has something to do with it. But I think in both cases, you can expect margins to creep up. We have costs increasing on us on the construction side, but we have return compression and rent growth that’s ahead of our underwriting expectations and that overwhelms the cost increases. So I think generally going to see margins expand.
Operator
And our next question will come from the line of Dave Rodgers with Baird.
David B. Rodgers — Robert W. Baird — Analyst
Hi, there. Maybe to start with Mike or Gene, wanted to ask on the inventory and the sales topics that you guys mentioned earlier. Obviously, the big increase in sales and inventory is not keeping up. I guess, when you talk to customers, what are they trying to solve for from an inventory to sales perspective? Maybe how does that vary between industries, if at all? And I guess, how do they take into consideration may be interest cost with interest going down? Does that change kind of their willingness to carry even more inventory in the near-term? Those type of conversations, but any color would be helpful.
Chris Caton — Managing Director, Global Strategy and Analytics
Hey, David, it’s Chris Caton. I’ll kick it off. So first off, as has been shared a few times, right now it’s fulfillment by any means necessary, trying to get goods into the country. Look, inventories are down 10% from pre-pandemic levels. And so it’s really just a race to get levels in. As it relates to resilience, I do think we’re starting to see this, but I think the specific numbers of people are looking at. They’re not yet at the strategic planning phase, they’re much more tactically focused on fixing their supply chains this year. Refresh up in our supply chain conference four days ago, 75% of people we spoke with, their poll survey said increasing inventories do have resilience related issues at the top of mind, and we’re starting to see that play out.
Operator
And our next question will come from the line of Vince Tibone with Green Street.
Vince Tibone — Green Street — Analyst
Hi, good morning. I wanted to follow-up on significant increase in your U.S. market rent growth forecast. I just want to get a little more color on which markets you’re seeing the greatest improvement in fundamentals and reviews last quarter? And also just hear how high you’re forecasting growth in Southern California and New Jersey and the likes?
Chris Caton — Managing Director, Global Strategy and Analytics
Hey, Vince, it’s Chris Caton. So indeed, we did make a material increase. And look, I think the facts of the situation are really impressive. Rents in the U.S. are up nearly 7% just in the first half of the year, that’s a record. And look, it’s not just the U.S. rents are rising, in Europe, they’re up 2% so far this year. When I think about different categories, let’s start with the coastal, the major markets on the coast, and we’ve had Toronto in there. Typically, these markets on an annual basis will outperform by 250 to 400 basis points. Last year that compressed as it was less differentiation. That differentiation has returned. And so we’re going to see these coastal markets in Toronto hit mid-teens I think this year. And I — based on some of the trends we discussed earlier, I’d say we should expect to see this relative outperformance widen in the coming years. Hope that helps you?
Thomas S. Olinger — Chief Financial Officer
Vince, this is Tom. I would just tack on the impact of — and on our earnings, right? I mean, we’re ruling around 16%, 17% of our portfolio a year now. So all of this good news on rent growth is not coming to the P&L right away. So you need to look at the in-place to market which significantly gapped out this quarter now at almost 17%. And as I said in my prepared remarks, it’s almost $700 million of incremental NOI, and we want to see where rent growth continues to go. But I would continue to think that in-place market is going to March a little higher.
Chris Caton — Managing Director, Global Strategy and Analytics
Yeah. And one other thing I would add. As strong as rents have been in some of these — the best markets, with today’s rents, today’s construction costs and today’s land cost, development doesn’t pencil. So when people are developing, that means they’re thinking, they may be wrong, that rents have to grow quite a bit from here or cap rates are going to compress significantly from here. I don’t know which, and they may be wrong. But I can tell you that with today’s marginal land cost and building cost, no way you come close to that clearing the margin and development.
Operator
And our next question will come from the line of Rob Simone with Hedgeye Risk Management.
Rob Simone — Hedgeye Risk Management — Analyst
Hey, guys. Thanks for taking the question. Kind of a two-part question for me, get back to your earlier comments on strategic capital. We took a shot at that valuation. And I think, Tom, your comments were really helpful. I think in many ways, they are probably too conservative. But on the growth rate side, so one of the things that’s a little bit tougher to handicap from the outside is kind of the sustainable growth rate and your capital raising. The deployments from contribution is a little more obvious from the numbers, at least historically. So I was hoping you guys could comment on how you see the fundraising environment kind of proceeding over the coming years? And then also, maybe secondarily to that, it’s really interesting. This is the first year that the net income excluding promotes kind of subsumed here corporate G&A. So from a valuation perspective, how do you think about addressing that? It’s obviously a huge benefit, but a big change versus prior year.
Thomas S. Olinger — Chief Financial Officer
Hey, Rob. Let me take a shot at this. Today’s — our third-party AUM is mid $60 billion. At the time of the merger, exactly 10 years ago, the merger closed on June 30 of 2011, exactly 10 years ago, it was $14 billion. So you do the math as to what the growth rate has been. But I think 10 years got to be a pretty representative period because we had some early not so great years in industrial and past couple of years have been really good. But I haven’t done the CAGR, but if you do the CAGR between $14 billion and whatever, $60 billion plus, it’s got to be pretty impressive. The guys are trying to do the math. Anyway, you can do the math. It’s certainly higher than what any valuation model would suggest. And I bet you, it’s higher than a lot of public company asset managers. It’s 16% annual growth rate in third-party funds under management. So — and the limiter on that growth is not our ability raise capital. We can go out there and raise — garbage more capital than we have right now. It’s just that we don’t want to raise the capital if we think we don’t have good deployment opportunities for it. So we don’t want our cues getting too long and investors to get frustrated, and we certainly don’t want to have a big queue that forces deal making line we see in a lot of other places.
Chris Caton — Managing Director, Global Strategy and Analytics
We’ve raised somewhere between $2 billion and $6 billion of good capital over the course of last three years depending on need. This year you will be interested to know that 60% of the new capital that’s raised is from new investors, new to Prologis. So that really underscores the broadening of interest in the logistics sector. The other thing that I think you’re going to find interesting is that 60% of the investors are now diligencing ESG as an imperative. So that really plays to our strength. We’ve been an ESG leader for more than two decades. So I think that’s a differentiator for PLD.
Eugene F. Reilly — Chief Investment Officer
Hey, Rob. I’d just also point out from a key focus on equity raising. But these are — our open-ended funds are extremely low levered. They are A minus-rated entities. They have significant financing capacity. So we’ve got a lot of runway just by using their balance sheets, not much less ours. And then thanks for pointing out your point about G&A and scale. I mean, that just tells you the power of the scale of this businesses. We talked about the AUM growth, that’s 16 over the last 10 years or 18 over the last five years, but it’s all about cash flow and EBITDA. That’s grown 26% CAGR in the last five years. And as we grow, the vast majority of that money is going to drop to the bottom line.
Operator
And our next question is going to come from the line of Tom Catherwood, BTIG.
Thomas Catherwood — BTIG — Analyst
Excellent. Thank you, guys. Hamid, just wanted to follow-up on your comment on industrial development not penciling out. Last quarter, I think you had mentioned that replacement costs could increase by mid — I mean, as much as 25% and that Prologis had gotten ahead of that by pre-ordering a lot of material, including steel. As we sit today, what are your current thoughts as far as input costs and how they could continue to trend? And is there a timeframe in which you might have to fully utilize the material you pre-ordered and we could see maybe more margin compression on the development side is yet to pay kind of market rates for those? What are your thoughts on that?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Yeah. In terms of our pre-purchasing steel, I didn’t want to create the false impression that we’ve got our entire development program hedged on steel costs, and we’re pretty much working through the steel that’s been hedged. So I don’t think that’s a big factor in forecasting margins going forward. My personal view is that some of the supply chain-related issues that have impacted material costs are going to subside. And there was a period out there a year or two years out where maybe the steel price escalation could reverse and get back on sort of normal inflationary trend once all the plants are back up and producing. But the most important thing affecting margins is what Gene mentioned a little while ago, which is that cap rates are compressing and rents are growing faster than land costs and replacement costs are going up. So the margins, if anything, are going to expand unless something material changes, that I can’t think of right now, particularly given the outlook for demand.
And when someone asked Chris about the different sectors and all that, notably absent in his sectors was housing. Housing is still not anywhere near its potential, and it’s a big consumer of warehouse space that hasn’t even kicked in. And you know how low the housing inventory is and how much prices are going up in the housing sector. So I expect actually that to be an additional engine of growth for demand.
Operator
And our next question will come from the line of Ki Bin Kim with Truist.
Ki Bin Kim — Truist — Analyst
Hey, thanks. Good morning. Just wanted to go back to the land topic. You guys bought more land year-to-date than you did in 2020. Just curious — so just a couple of broad questions. You already have a pretty sizable land base, I’m just curious about what the thinking is behind that? Is it [Indecipherable] good that you had — I think your market value land to put it to work relatively soon or is there a longer term element to it that you think the demand is long lasting and so good that you wanted to replenish the land inventory? And also, how should we think about the $18 billion of build out in your land bank today? Should we expect that to start to gets smaller as we do more development or is this a level that you plan you can maintain just to keep things humming along?
Thomas S. Olinger — Chief Financial Officer
Yeah. Couple of things, Ki Bin. First of all, land comes in couple of different flavors. One is raw unentitled land, of which we buy some, but not a lot. Second comes in the form of options that we actually don’t buy. It doesn’t show up in the period when we made the deal. It shows up in the period that we actually closed the land option. So I don’t know the specifics for this quarter that you’re looking at, but we can find that out. But it could be closing in options that we negotiated many, many moons ago.
And finally, the infrastructure costs of improving land shows up as land. And it may not be actually new land, it may be just additional infrastructure on existing land. For example, in our Tracy Park, we’re doing million square foot buildings like they’re going out of style. And along with that, we need to put the infrastructure in, and with that land we bought in 2012, but that infrastructure, it shows up as a little land.
Finally, an increasing percentage of our land is covered land place, and they have an income stream and they pencil as investments even if we weren’t going to scrape them and redevelop them down the road. So these are land purchases deals that are actually pretty attractive in their own right, but they also have an embedded upside in terms of developing new product.
Gene, anything?
Eugene F. Reilly — Chief Investment Officer
Yeah. So Ki Bin, if you look at that $18 billion of build out, about 44% of it is either covered land place or option land. And if you look at how we are replenishing land bank over time, we’re sticking pretty much to those ratios. So nearly 50% of it comes in those two categories. And with respect to the size of the land bank, it’s got to grow. Our development program is growing, and you’re going to see the land bank grow along with it.
Thomas S. Olinger — Chief Financial Officer
Yeah. Good example would be this Hilltop transaction that got all this attention that all of a sudden are we going to the retail business? No, we’re not going to the retail business. That’s just another way of buying land with the yield on it. So — but it’s [Indecipherable] chunky. It’s $100 million. So that shows up. They can move the numbers around in a given quarter by quite a bit, but it’s covered land place at the end of the day.
Operator
[Operator Instructions] And our next question is a follow-up from Jamie Feldman, Bank of America.
James Feldman — Bank of America Merrill Lynch — Analyst
Thanks. I just wanted — I have two quick follow-up questions. One is going back to the supply chain shortages, pleasantly surprised to see you raised your starts guidance and your stabilizations guidance. Would you say that we’ll see that across the board in this sector or there is something specific about the PLD platform that let you continue on with your development plans? And then secondly, you mentioned housing is not yet at its full potential for demand. Any thought, latest thoughts on re-shoring and what that could mean to demand? And then anything coming out of Congress with the infrastructure bill that could also be a driver of growth? Thank you.
Thomas S. Olinger — Chief Financial Officer
Yeah. On the infrastructure side, a lot of it isn’t infrastructure. This is I can tell. So I don’t think those things are necessarily going to add a lot of business. But real infrastructure for starts apart, this is less than $1 billion should be really great for the business. Onshoring is, I only see onshoring in newspaper articles. I haven’t really actually seen them. And if you look at the import numbers, we set month after month of records. And now I do think there will be onshoring of medical supplies and PPE and some of the things that are strategic to use an over-used word. But generally speaking, we just don’t have the resources, the infrastructure, the labor, the know how to manufacture a lot of the things that come into containers.
Gene, anything?
Eugene F. Reilly — Chief Investment Officer
Yeah. I mean, I think you will see in the Mexico, they are seeing it. But I don’t think you see shoring here. What was the first part of your question?
Chris Caton — Managing Director, Global Strategy and Analytics
What we see others.
Eugene F. Reilly — Chief Investment Officer
Right, right.
Thomas S. Olinger — Chief Financial Officer
I have no idea. Yeah, I mean we’ll find out in a couple of weeks. But the — I can tell you that — and you’ve heard us talk about this for years now. We’ve really taken the customer and put it in the middle of our business, and that is paying dividends. So this customer-centric model allows us to do a lot of business. By the way that playbook will get like copied like everything else. So I assume, other people will do the same thing. But so far, we’re doing great with major customer business, thanks to the good work that the teams are doing.
With that, Jamie, you were the last. So thank you again for your attention. And we look forward to talking to you before next quarter, for sure. Take care.
Operator
[Operator Closing Remarks]