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

Why don't we get started here. So welcome to the Prologis roundtable this morning. Joining me up here is Tim Arndt, who's the CFO of the company. And we have Justin Meng, who heads up IR. So Tim, I'll turn it over to you for some opening remarks.

Okay. Thank you. Good morning, everybody. It's great to be here. I'll just begin with a quick description of Prologis, if anybody is somehow unfamiliar, but we are, of course, the world's largest logistics REIT. We have $1.3 billion of assets across -- I'm sorry, $200 billion of assets across 1.3 billion square feet in 20 countries. Our markets are principally characterized by large, more consumption-oriented supply-constrained markets for logistics distribution. We run alongside those large operations, a very successful development franchise, developing about $4 billion to $5 billion on average of new logistics properties per year. Across the last 20 years we've developed nearly $50 billion of such assets, creating about $14 billion of value in the process. What's exciting about that is that's a great track record. You attach that to the fact that we have $42 billion of investment opportunity from here in a land bank that we own and control. That would be almost 10 years of development opportunity that I actually hopefully plow through more quickly than that, but the runway for growth and value creation is pretty significant in that regard. We capitalize all that, of course, in the public markets, but also together with an asset management business that we call Strategic Capital internally, it encompasses about $65 billion of third-party AUM. And it's a great way to, not only spread the capital need of such a large business, but it also diversifies what we can do in terms of our holdings, our markets, our availability for customers in a way that enhances returns of the core real estate in and of itself, of course. And then on top of all that, I'll maybe just close by saying we have always said that bigger is not better and better is better. But putting that to the side and as I've given, reaching the scale that we have in the last 6, 7 years through a lot of M&A and portfolio acquisition has given us an appreciation for what we can do with the platform that we can launch a number of businesses off of it energy business, our Essentials business, which we can get into a little bit here. But it also has given great opportunity for higher and better use opportunities, which has always been the mainstay of our investment philosophy, but is at a different level with the data center conversion and AI opportunity that's ahead of us now. The fact that we have 6,000 buildings, 15,000 acres has a rich palette to draw from for value creation in that business as well.

No, thank you for that. So just as a reminder, I mean, I want to keep this interactive. I'll start off with questions, but if there's anything, just let us know. So uncertainty has been a theme this year, in particular after Liberation Day, tenants have been slower to make decisions as a result. Has this improved at all over the past few months now that we have some clarity with trade agreements here?

Yes. I would say it's improved. And if I back up a little bit, we're encouraged by the activity we've seen in this quarter, and that's been a continuation of positive momentum, slow but positive momentum that we saw play out over the second quarter. So on April 2, we, like many, were at first concerned for sure of what all the tariff news brought and how it was something that felt very focused in our industry and what the implications would be. We described a slowdown in leasing that occurred early in the quarter and did remain below average historical levels over the duration of the second quarter, but did improve, however, the level of lower decision-making and lease activity did improve by the time we got through June. And we described that at the time of our July earnings call is what felt like and we even heard from many of our customers was just either exhaustion or the need to look through what all the permutations on tariffs could bring to their business. They couldn't hold off decision-making for too long, begin executing on leases. We saw that principally in the renewal side of the business versus new leasing. And you can imagine that renewal in a way to me is like almost making new decision, whether you're going to expand or contract or relocate. You might just stay in place. So that is an easier decision than some of the new leasing. And indeed, in the second quarter, customers' decision to take on a new lease. We had a lot of proposals for that. We described a very large leasing pipeline, 130 million square feet at the end of the second quarter. A large chunk of that is in the realm of new leasing, but the conversion of those new leasing proposals to signed leases had been well below average levels, and that was a contributor to lighter volumes more so than renewal activity. The update this quarter, why I say things are encouraging is that, that piece has be too strong to say unlocked, but it has improved. The conversion of new leasing proposals into signed leases is now occurring at a better rate, not yet the historically normal rate, but at a better rate than we had seen in the second quarter. I think that's probably thematically for the same reasons that we described in the second quarter that there's not just exhaustion out of tariffs, but I just feel like the tariff conversation has moved a little bit more into the background, likely because many customers are understanding more with the passage of time, how they might be able to deal with tariffs, no matter what the outcome ultimately is, what they can do in their margins, what they can pass on, what it will mean to their footprint, where they can source goods. More of those questions are getting answered and allowing customers to proceed on their decision-making and their supply chain.

So it sounds like in sort of in July and August, things are moving in the right direction here.

Yes. And look, and I should say we're not out of the woods. So let's not run away with that. But the signs have been encouraging. I'll add another, which we highlighted in the second quarter was our build-to-suit activity. So we had at Prologis $1.1 billion of build-to-suit starts in the first 6 months of the year. That was a record for the company in terms of its volume. We had been talking about that over 2024 that there was a lot in the build-to-suit pipeline, but decision-making was slow, the deals weren't being made. But now they had been, and we had a record volume there. That pace or at least the success there, I should say, has kept up. We've signed up 8 new build-to-suits here in the third quarter. Pretty well diversified across geographies and customer types, not a theme there. But we have described that as we think an indicator on where sentiment is as well because the kind of customer who is engaging on the build-to-suit is someone who is probably larger in size for one, a bit more -- has a bit more capital availability probably thinking a little bit further down the field and strategically about their supply chain needs. They're probably taking on a 10-year lease, not a 5-year lease. They are planning to not have this space immediately, but instead are 9 or 12 months. So if we unpack that as an indication of where the market would like to be and those who can act in that way are, we would see that, that behavior -- the launch for space and the need for continual optimization of the space is present in the market, the smaller and medium-sized enterprises who may have less capability or just looking for a little more clarity, either in the tariff environment or just in the overhang that it's creating.

For the deals that you are signing, I mean, maybe talk a little bit about box size and the markets where you're seeing more activity than others.

Yes. One thing we're noticing and trends come and go, so you can't extrapolate too much from them. But the larger space sizes have been leasing better. And it's at times very large space sizes, but we would even to mark that around 250,000 square feet and above has been moving better. Markets, we would characterize similarly as we have in the last few quarters. I mean we know where markets like SoCal are and how they're adjusting. They have longer -- a longer period of time to recover and inflect, but stronger markets remain in LatAm for us, Southeast U.S., Europe has been stable. And on the build-to-suit front, I think 4 of those 8 build-to-suits I just described are out of Europe, and we had very good build-to-suit volume in Europe last year as well. U.K., Southern Europe stand out as stronger areas for that activity. So that would be a description of what's stronger and weaker.

On the 130 million square foot that you've talked about, I mean, is -- it sounds like that's where the number is today as well?

Roughly Yes.

Right. And is there anything you're doing proactively at Prologis to convert this activity into signed deals?

Well, I hope so. Yes, I mean that's just our bread and butter moving those deals through the pipeline, getting them converted. Maybe a version of your question is how are we optimizing for rent change or occupancy? And I would say, look, we're still in the mode of solving for occupancy on a global basis, I would say, if I were to sum up all of the individual markets and transactions. But you should know that by right of our scale and the data that we have about our the knowledge we have of our customers, the truth is we don't optimize that at a global level. We set it really down to every single lease. There can be situations where we know we don't need to solve for occupancy that this is the customers only alternative for whatever the reasons, and we're going to push rent in those cases. So it varies, but I would say if I boiled it up to the global level, we're still looking to build occupancy because, frankly, we see the market as building a little more vacancy in the next 2 or 3 quarters before it tops out in the U.S. a little below 8% is our view.

In terms of that, again, that $130 million, can you give us an idea of how that number is sort of calculated in terms of -- I mean is it -- certainly, there is active conversations with tenants on -- the customers on that. But at some point, how does that math work to include that or not?

Look, it's just a simple aggregation of what we sales force. It's what is in our sales force funnel at various stages. It can be anything from a proposal stage to a final stages on negotiation. One thing that we report out to all of you in our supplemental is out of that pipeline, how long are deals sitting in there to give you an indication on market health and what's happening. We call it gestation and that number typically sits in the mid-40s days. Now I think one thing you should expect to see when we report the third quarter, and I don't know this number yet, but I bet we're going to see gestation pretty long. I thought we're going to see 50 -- I wonder if we could have a 6 in front of it in terms of days and that's actually going to be reflective of the consternation that's sitting in the pipeline, which is that there's a lot of deals sitting there. There's a lot of interest in space. And once again, that's the positive that we take away from the way the pipeline as well. The deals are lingering there because customers know they want to be made, but their decision-making has slowed. So by the time they actually release and get signed, we're going to report on those signings on September 30, but we're going to see there are deals that have been in the hopper through maybe much of the second quarter, for example. And we could see some elongated number of days on that basis, but it shouldn't be misconstrued for that reason.

Just wanted to get your view on kind of your latest views on net absorption here, right? And how you're thinking about that vacancy and market rent growth as we look over the next, let's call it, 12 to 18 months?

Yes. We haven't updated our view on net absorption here. Our call wasn't so long ago. We think we said somewhere between 75 million and 100 million square feet on the year here 2025. Beyond that, we have not forecasted and are not doing that today, but we have said we believe that the path of absorption and the way we see deliveries coming into the market over the coming quarters, we'd see the bottoming on vacancy at 2 or 3 quarters out from July was when we had said that. So that remains our view. We would have thereafter, an assumption logically of some building of occupancy, the pace remains to be seen. But that will be an environment where market rent growth, positive market rent growth can now occur. We sometimes get asked, do we need 5% vacancy to see market rent growth? No. And in fact, we've got materials out on our site. You can go find where we've plotted individual vintage years of market vacancy against what market rent growth has been in those years, and you see plenty of years we're at 6%, 7%, 8% and vacancy levels, there is positive market rent growth. It gets more intense as vacancy gets tighter logically, but we can start to see that show up even next year.

Got it. Great. I'll just stop there. Is there any questions that anybody has?

[indiscernible] Obviously dominant player, but are you finding a lot of competitive set relatively low that hard...

Well, they are -- maybe that's a relative content about the difficulty of entitlements, but they're definitely harder than they were 10 and 15 and 20 years ago. We used to think that you needed to prepare to build an industrial site 6 or 12 months ahead of time. In many of our markets, we're thinking about 3 and 4 years at least. And on the entitlement front to stay on that, there's large import markets of ours like in California, probably our biggest holdings where new legislation is actually prohibiting for regulatory reasons where new logistics sites can be never minding just traditional geographic and other barriers. So new supply is going to continue to be very challenging to bring to the market.

So those barriers are helping. What about [ starts ]?

Look, starts have been low. Starts have been 30 million, 35 million square feet per quarter, which are levels that -- in this first several quarters running now kind of on average. Those are levels that you'd have to look back to around 2015 or so to find a similar level of starts. So that's good. It gives us a lot of visibility on incoming supply that's going to help to reduce the vacancy rates in time. I think this is a good place to drop in a more nuanced point, but as you're watching starts, you're watching what we're doing and the kinds of -- I wouldn't say just markets that Prologis is in, but our submarkets, you have to look at where the starts occurring is that the weaker or stronger, more supply-constrained submarkets of those markets. And then there's even another category of, well, what is the Class A supply in the submarket of this larger market. And so we start to very thinly slice where we want to be. And you may see others going in more broadly out of market, bringing supply that just isn't going to be competitive with our portfolio.

And let me just clarify, the new leases on that, the improvement that you saw this summer. That excludes the build-to-suit, right?

That's right.

Is it any -- is that any particular tenant type, any particular region, any particular size?

No, except to say that, again, the larger sizes are doing better. But beyond that, I would say it's pretty widespread kind of the level of success and conversions on new leases across markets and customer types. On customer types, maybe -- so this would be new and renewal. We do see more strength out of what we would call our basic daily needs kind of category of demand, which is going to be consumer products, food and beverage, 3PLs, transportation companies, those industries that support basic daily needs. Those have been the pockets of strength out lately.

Can you dive into tariffs? Just a bit more like what you're hearing from your customers. One of the things that I think we've heard in KKR was just talking about this, that it's kind of a long tail to when these costs will ultimately get passed on to the consumer. And like are you hearing the same things from your customers or at the end of 3Q, are we going to find out that most of that cost has been passed on. How should we think about it?

Like I said earlier, I think the tariff conversation has drifted a little more into the background. So we're not -- that's not an active part of the dialogue with our customers. I think everyone just out in the economy is thinking about those implications similarly. It seems to -- who knows where this legislation is going to land on tariffs. If it's unsuccessful, meaning the tariffs remain. And we've seen at least the framework for a lot of tariffs now come around this summer, and it feels like there's maybe going to be a global average of something on the order of 15%. It's starting to feel like that's going to come through in like almost something akin to a value-added tax in the economy, and it will get absorbed through some cycle of consumption and then we would be in a more regular level of growth and consumption there thereafter is kind of the way I think about it. But with regards to hearing customers talk about it and the implications, it's drawing in their supply chain. It's less active part of the conversation because they're just needing to move on and have envisioned the ways that they can deal with varying outcomes post.

What about on the development side? I mean, go back 3 or 4 months when it was -- they were first announced, it seemed like you weren't seeing an impact now that we're a little further down the road, are you seeing cost change at all in any certain components?

Yes, not materially just yet. We look at it more in aggregate and have seen where we have seen price increases in certain economy -- sorry, commodities. It's been so far absorbed and there's lighter construction volumes generally. So the margins imposed by GCs and their subcontractors have contracted to a degree that we probably put overall cost reasonably flat in a short period of time. But I would definitely assume that replacement cost -- that won't last forever as those margins get tight development activity picks up, they may expand again. The inflationary pressures on the commodities and raw materials will be present as well as labor, of course, we know will be a factor as well. So we've sized replacement cost rents which is something that I think everyone should be focused on in this space at about 21% above market rents. There's enough vacancy in the system right now that that's not going to be a force that drives market rents just now. But as we see vacancy levels tighten, we see this historical pattern that, that will take hold and could be the next catalyst for more robust levels of market rent growth beyond just inflation.

If I could just clarify on the absorption part the stat you mentioned a moderator economists yesterday, said BofA's view will muddle through the coming year, the coming months I guess what does it take for the economy to reach that absorption? Is that just based on...

It's funny to ask a question that way because I feel like our absorption forecast reflects muddling through at 75 million to 100 million square feet and maybe it maybe it needs context, but a good healthy level of absorption we would put around 200 million and 225 million square feet per year. So -- and that level, if we were in 75 to 100 this year is following a year in 2024, where it was also subdued.

Okay. Tim, I want to shift gears a little bit here. Maybe talk about the transaction market, kind of what you're seeing there, what's the appetite of buyers and even pricing?

Yes. The transaction market continues to pick up. I feel like quarter-over-quarter across 2024, it was getting -- finding its footing, getting a little bit better and better. This year, I think volume is up 15% further year-to-date, multiple bidders at transactions we probably see values as at least as guided by our appraisals as relatively flat in this quarter, which I think is a function of a couple of things where probably a little bit of delay on what the inflection point is out there in the market held by most participants, a little bit of a pause on where market rent growth would resume. So those would be some factors offset by lower cost of capital, lower discount rates that we're seeing in pricing. We would put -- we tend to not focus on cap rates and really focus on IRRs, which we put between 7% and 8% today, unlevered in most of our markets. We are buying on that basis, but we also have a great focus on discount to replacement cost as well, particularly in markets that we consider as very strategic to the portfolio.

Got it. Data center has certainly been an area where you guys have been focused on. Talk about your vision for this part of the business as we look through over the next few years.

It's an incredible opportunity. I think it's -- I don't want to say it's underappreciated in the market because part of it's our own doing. We're a little careful in how we talk about it. We're reporting, as you know, successes as they come when we obtain more power when we have a new build-to-suit start as we have sales, we'll have news in all of those categories through the balance of the year. We've always had a desire to have an investment strategy that not only puts our assets close to consumers and makes them the best choice for our customers, but in that way, creating an ability for higher and better use conversion opportunities. And we've had scores of those over our history, but none of them have been at the level that this AI conversion opportunity -- data center conversion opportunity brings us because a lot of our logistics buildings look and feel at least in their shell and format like a data center. Again, we have 6,000 of them kind of as a pallet for us to choose from for future conversion. We think a wave of inference use in AI and data centers is probably what makes that even more interesting. The fact that we do have smaller facilities close into where that usage will occur. So we might see much more conversion opportunity there. So we view it as an obligation, even more than just an opportunity to chase this hard. We staffed around it pretty significantly. We've about 30 people dedicated to the business. That number was almost 0, probably a couple of years ago. And when you match with that, just the development expertise the rich palette of owned assets, owned income-producing assets that we can convert as the opportunities arise. We have an energy business that was in-house anyway, helping us procure energy for it then a huge balance sheet and procurement capability behind it. Not to mention the customer relationships are there. We have every right to win in this space.

The other area that I know you guys have talked about is the essential business, right? And help us understand kind of how that differentiates you from your peers and others?

Yes. I think it's in process, and I think it's going to be a great thing for Prologis. But one of the things I mentioned earlier getting bigger and new opportunities that it's bought Prologis. And that was happening in a big way for Prologis between, say, 2015 -- in 2020, we had a lot of M&A amassed a lot of square footage, gained a lot of new customer relationships that was occurring at a time that we were gaining an appreciation and the strategy to be much more customer-centric and focused as the nature of logistics used by our customers was changing, meaning it wasn't just a commodity of something they had to have to facilitate their real business as e-commerce grew and service levels became paramount to winning sales. And whether you're in e-commerce or not, a brick-and-mortar retailer needed to compete with e-commerce. So that drew, as we all know, the supply chain and where to make it a much more strategic asset. So we view that as an opportunity to have a different kind of relationship with customers and Essentials was sort of born out of those few concepts where we see many of our customers are smaller and medium-sized enterprises. They're moving into spaces and often procuring the same goods and services. They're setting up IT technologies. They're putting racking to their warehouses, forklifts. They're doing all that activity on their own when they leased with Prologis previously. And when they lease with any other landlord today, they're certainly doing it on their own. We viewed an opportunity that we can help in that, have an EBITDA contributing business alongside it. But even if that were 0, which it's not, it's a profitable initiative for us. But even without the ability to grow closer to our customers and be a landlord of choice was something that we view as a very important objective of the business.

Anything on the funds business and any latest updates on that side?

Yes. I mean a normal update just in terms of like how our fund flows and the open-ended fund raising. Folks following that business will know for 3 years now really, it was this quarter in 2022 that we really started to see a change in yield requirements, discount rates, fund flows into this business, and it's been uneven since that time. Right now, we're starting to see some LP interest come back into the open-ended funds. But it's going to be perhaps from here on out more muted than some of the really, really large injections of capital that we saw through the 2010. So that was the time that the product type was still becoming institutional and the kinds of investors we have in that business were still building their positions to get their allocations right. A lot of that has come. And what we have strategically opted to do is focus on where are the next capital sources for the business which are going to now be varied. We may see more joint venture kind of capital from folks who want to invest, but aren't necessarily in it for an open-end format. They expect to be in a closed-end format or in a JV format for Prologis. We're open to that. We're in exploration of that. We have other portfolios. Canada would be an example of a very large excellent portfolio on our balance sheet that could get recapitalized. We're exploring that. So it's just to say we're looking at the business in new ways that spread out the kind of capital that we can access because we'd like to give it a new wave of growth from here and expand on that $65 billion of third-party assets under management.

You brought up growth here. I mean, for the investors in the room here, I guess, how do you think about -- how should we think about sort of the growth algorithm for Prologis over the next few years?

Yes. Well, look, I think I believe this wholeheartedly. I think we've got the best mousetrap in REITs for what is a great underlying sector and business in our the portfolio we have, the team we have, the customer relationships we have, that's just foundational to our growth. And I think we have the best baseline there. Then just the additions to growth, the business model that we have that I described of a large development engine creating value creation kind of on the order of $1 billion of value creation a year when it's running in that normal run rate. The recycling model that it brings, putting those assets through strategic capital getting capital back to reinvest, growing the fee base, growing the diversification of the portfolio. That's novel in REITs as you'll know, and I think it's really been an important part of the growth algorithm. Leverage is typically a piece of it, of course, we would have. And then all the additions from the ancillary businesses that I've described, essentials and what we can do in data centers. All of that would put you in a high single digits kind of growth rate in a normal environment. A couple of headwinds that we have right now. We've seen them here in 2025, probably still see them looking into next year would be -- we don't have financial leverage. Many REITs don't as portfolios are going through marking debt rates up to market. So that's something that Prologis is not immune to. We have average in-place interest rate of 3.2%. We have 8 years left on that rate. That's a great favorable thing. That's a positive item. And if you were marking it to market. But debt rates for our portfolio would be about 4.25%, 4.5%. So that would be our destiny if all things were equal and we rolled up. So clearly, that's a headwind. I think that's understood. And then the way we're deploying capital, we've had fewer starts in the last few years. So those contributions as those assets are stabilizing are less than they are normally at the same time that we're going to be increasing very likely capital committed to new developments, both in logistics and data centers. So that can have a drag effect as you go through that transition. But ultimately, the high single-digit format is very much our belief on where the long term would be.

Okay. So even with some of the uncertainty and the headwinds out there on the macro, you're still growing at a very strong rate into kind of even next year and the years after, right, the high single digit?

Yes, I think that's the long term. And then if I look at the setup for going into '26, a lot of what you look at for '26 looks like how things looked a year ago for '25.

Great. I have a couple of minutes here, but are there any underlying trends that you think the investors are sort of ignoring or not appreciating that will impact real estate and logistics in the years ahead?

Well, I'm not sure that they're being ignored, but I would just emphasize, it's a -- I love the asset class, I've worked in a couple of commercial real estate industries. I love logistics. It's a product type that it's substitutions, it's options to be disrupted from technology or much fewer than we see in other property sectors over the years. It's getting harder to build for our earlier conversation. They're not making any more land. It's going to be more and more challenging to bring this product into consumers. So I think that dynamic and that setup is very strong. The e-commerce growth driver that we've seen in the last 10, 15 years, is still in effect. We see continued penetration in the amount of retail sales that will be executed through the e-commerce channel for years to come, and they're that 3x multiplier that, that brings is still present. So that backdrop of both supply and demand are very favorable for the sector. Then I just think you go back to, well, who has the business model to execute on it really well in a capital-efficient way, who is then squeezing -- and this is what I really think is the case with Prologis squeezing everything out of the platform that we can from solar generation on the roofs to essential sales inside the building to chasing higher and better use conversion opportunities that I think most investors appreciate all those things, but we love the opportunity to remind everybody.

Rapid fire questions. Number one, when the Fed starts to cut the rates -- the short-end rates, what happens to the long-term yield, a 10-year yield? Does that decline, stay flat or potentially rise?

I guess I'd want to know how is it being cut. I think it's how this gets executed. The long end of the curve 30 is already speaking volumes in some ways. Would it rise further? I'll say no. It's gotten elevated. But if it's not executed well by either the administration or the Fed, like we could have a different outcome.

Okay. Number two, we didn't talk about AI initiatives. But last year, the majority of companies stated they are ramping up spending on AI initiatives. How would you characterize your plans over the next year, higher, flat or lower?

Higher.

Okay. And last one, this is overall average for the sector. Do you believe same-store NOI growth for your sector will be higher, lower or same next year?

I think with the setup there will be about the same.

Thank you very much.

Thank you.