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

Dark Cooper, Global Head of Real Estate Equity Sales and for various reasons, you have me moderating, but I would welcome all of your questions as we proceed, particularly around the things that I'm not allowed to mention. So thank you to management. We have Tim Arndt, CFO; Justin Meng, Head of IR. I call from your team, right? You don't have as well here with us. So to jump right in, maybe you can give us the latest updates on leasing and tenant demand into September, hit on what's changed since earnings and the pipeline as well, if that's okay.

Sure. Well, good morning, everybody. It's great to be here, be back in New York. Maybe I'll just even widen out a little bit further and touch on the quarter overall and how the business is performing. In a nutshell, things are going very well. If we just begin around the operational part of the business, all of the trends that we have been talking about for really, in my view, about the last 8 quarters now that I think the market has taken more notice the last 2 or 3. All those positive trends around our leasing volumes, the pace of decision-making, lifting of occupancies. We've seen a couple of quarters of positive market rent growth. All those things have been continuing here into the third quarter. That's been great to see. It's something that is facilitating continued growth in our value creation business, namely development of logistics facilities for one part. That's an area of our deployment that had been more muted going back to, say, 2024 when conditions didn't really warrant. But with all the improved conditions and tightening that I'm describing here, that's picked up meaningfully together with a lot of the data center opportunity, which I'm sure we'll spend a little bit of time on. That's all being fueled by 2 things really, our strategic capital business. We have nearly $70 billion of AUM, third-party AUM that is supporting all of that ownership and growth, but also our balance sheet in and of itself, where we just had an equity raise in advance of the SGRO transaction, which is the cherry on top of all this, a very important transaction that's still underway for us in Europe, but a highly complementary portfolio and team that we are working through its closing. That's something that's going through various regulatory processes, including a shareholder vote at the end of this month and something we expect to close in the first half of next year. So across the board, things are going great. Sarah, I think specifically on some more of the numbers, I think here in the third quarter, we'll probably see lease signings. We've had a number of records on overall lease signings for Prologis in the last several quarters. And that's been 60 million, 65 million square feet. It's been the hallmark of what's a record for us in terms of signings within a quarter. I suspect we're going to see a number in that ZIP code again this third quarter. We're not fully done, but the first few months have been great. As we really more finally parse the pipeline, we're noticing that deals in our agreement stage are accelerating. Things are moving through the system a little more quickly. But the thing that we're always appending to this indication of activity beyond the signings is just whether the pipeline itself is getting replenished with new demand after we have a record quarter of new lease signings. And that trend is continuing. We're seeing our lease pipeline stay well over 100 million square feet in new inquiries, which has been great to see.

Can I -- I think there's a few things to dig in on there, but one of the things K Kaplan said this morning, I think, was that 15% of their logistics leasing was related to the DC build-out, and I know we talked about that at NAREIT. Can you be seeing about the same or more or less?

We've seen -- we would call it about 10% of our new leasing has been dedicated to some form of support for the data center build-out. So yes, we think that, that is a new segment of demand that's probably longer standing than some people may think. There's going to be a couple of phases of it, one that will be fulfilling this new build-out. There's an ecosystem to build out. But the replenishment of these systems, the chips themselves, the hardware, the MEP, all of that is going to need repair, maintenance, replacement over time. And so there's going to be a long-standing demand addition from this segment for sure.

Okay. Did anyone else want to ask any questions relating to those opening remarks before we move on? Okay. Maybe now we can just touch on the market, U.S. net absorption deliveries, vacancy and market rent growth as we look out for the next few quarters?

Yes. So we had a -- many of you probably know we had a meaningful tick up in net absorption in the second quarter, 66 million square feet, I think. We haven't seen a number that high in quite a while. I would say, for me, the net absorption numbers we had been seeing for the prior 6, 7, 8 quarters had been almost inexplicably low. We would expect that a good productive market, net absorption in the U.S. should be around 225 million square feet annually, let's say. So that $66 million figure in the second quarter was in keeping with that, a little bit ahead of that. But all the quarters we had seen where we were registering some 30s, 35, low 40 number have been quite low for the level of activity we had seen from our customers. And the explanation of all that was very clearly, it was just working through the overabsorption of the space that we saw early in COVID. We saw occupancies lift very high, customers take a little bit more space than they needed. So across 24 parts of 2025, that had slowed down. We had been saying for a while, we thought that was running out that customers were getting their portfolios rightsized, and we're going to see new incremental demand. I do think Prologis saw that empirically, I would say you can see that in our numbers ahead of the market because we had these very strong leasing volumes since the end of 2024, really, building occupancy over the majority of the course of that time, while market occupancies were actually still declining for Astella. Now they've bottomed and they are growing. It just looks like we're a few quarters ahead of that due to where our portfolio is and its quality. These are conditions that are contributing to positive market rent growth. We're a global portfolio. We've seen positive rent growth outside the U.S. for a longer period of time, probably backing up about a year now, places like Europe and certainly LatAm. So we've benefited from that for a while. The U.S. had been slower to get to that point. But in the first 2 quarters now of this year, the U.S. has been a contributor to that. And I'll add on the outlook on market rent growth, we describe our businesses rationally, we would say, inflation plus on market rent growth expectations for logistics. And the plus, I would just put in a pile all the secular drivers of logistics, which e-commerce is at the top of that list, but now it's becoming other things like advanced manufacturing, like the data center build-out. There's a number of things that add incremental demand beyond just inflation. The other component there that's working that's kind of stayed wide due to the level of vacancies in the market is replacement cost rents. So I'll back up for just a moment, giving a long answer here, but we have our lease mark-to-market, which is just a measure of how much higher our market rents than the leases that we have in place. And we sized that at 17%. It's worth about $700 million on memory that if we do nothing else, just uplift the portfolio up to market rents as leases come due, we'll bring in that $700 million. But then there's another measure, what is the gap up to replacement cost rents? How much higher are replacement cost rents than market, and that's another roughly 20%.

Sorry, another on top of the 17% or just...

Another on top of the 17%. So you compound those numbers, you're getting 38%, 39% would be the. Total gap of rent to be collected. That phenomena aside from all the inflation plus kind of theory on the case for market rent growth, closing that gap, which we've seen historically occur in real estate cycles, would put market rent growth into a mid-single-digit kind of ZIP code. I think for some years running until that gap closes. Now we're not here to say when that commences and at what pace it goes and how long it runs. But that's a lot of rent gap that is irrationally priced right now, and we think we'll need to close, and we have seen close in past cycles.

Sorry, you said into mid-single digit?

That's an annual number. I'm just saying annually. I think if you put those pick an inflation number, and we all have our guesses now where it is and then a plus on top of that from the secular drivers, I think that puts you to 4 or 5, pick a number. We're just saying that you also, on top of that, this replacement cost rent gap and economics shouldn't exist for a long period of time, and it kind of depends on how quickly the markets tighten from here as to how quickly market rents will rise to close that gap. So yes, maybe to your point, Sara, maybe mid-single digits is conservative. It could certainly be a

Okay. maybe we can hit on where you're seeing the strongest and the weakest markets at the moment and talk about SoCal?

Yes. Look, the strongest markets are on a spot measurement, I would say, how well our markets occupied? How good is the market rent growth been recently? That remains Sunbelt kind of markets, Southeast U.S., Texas remains strong. I would say some of our central U.S. markets have been surprisingly good for a long period now Indianapolis, Columbus, Memphis, we are definitely seeing signs of that rotating back out to the coast. So you mentioned SoCal, SoCal, -- we would say is is definitely inflecting. It's a quarter or 2 behind the U.S. but for our holdings, which we have a lot of the Inland Empire, a lot of our holdings are in fire West more modern product in the South Bay. All that product is doing quite well. We're very highly occupied in SoCal. We're over 96% occupied there, strong rent growth. So I do think -- I say all that to have folks kind of zoom out, at least on our experience in SoCal, that it has been pretty good, frankly, for all of the discussion we've had over the last 3 years. Our portfolio has actually performed quite well. New supply is limited there, as you all know, and they are benefiting from some of the growth we've seen in advanced manufacturing, defense, et cetera. Weak markets, if I go to that part, Seattle is still a little bit behind in the U.S. probably Central Pennsylvania still a little bit behind where we would like to see it, but I think they will catch up and then globally, China is working through its excess vacancy.

Have you still got that?

Less than 1% of our portfolio is in China.

Okay. Can I ask your views on the European market and new Gro acquisition?

Yes. Europe has been a bright spot, I would say. I mean, so I'll come back to Sigroin just a moment. But beyond SEGRO, I think Europe is an underappreciated stabilizer of our portfolio. It's got very strong and steady operations. It didn't have the large oscillation in rents and vacancies that the U.S. experience. So it's normalization post COVID was less extreme. As I mentioned, its occupancy stayed high, began producing positive market rent growth sooner than markets in the U.S. did. We love the markets there. Segro brings us opportunity to combine a portfolio that we've admired for decades, literally, we've known that portfolio and that company for a long time. We have tremendous respect for the company and what they've built got to know their team here in the process so far and really look forward to combining both our platforms and our portfolios, which are very complementary across these markets. We have a 100% overlap in terms of markets that we exist. Prologis is in some markets that is not, but not the other thing around. But the product offerings are quite different and the complementary state that is going to be Fantastic.

So sorry, just the question was, have you seen the impact of the defense spending and the impact of the de minimis rule on the 3PLs?

Yes. Yes. The answer is yes on both fronts, and this is in Europe. So yes, and it's hard to draw a direct line in defense spending and uses within our buildings, but just the nature of space that is being taken up across Europe. There has been increased spending as we've seen. And I guess as you look at the state of the world, the potential for that to increase more is certainly working. And then, yes, look, the change of the de minimis ruling here in the U.S. and just of trade and tariff patterns generally, including not only Europe and China, but Canada and other places, we're seeing benefit our global portfolio, indeed.

Maybe we can move on to the development side of things. It's been a pretty active year, particularly for build-to-suit customers. Can you talk about what you see is driving that? And if the momentum is sustainable where it goes from here?

Yes. So I'd start by saying to understand the build-to-suit business our product may seem like a commodity and in some ways it is, but it's definitely not homogeneous amongst the submarket. The product is in if it's institutional or grade A quality, you need a particular size or shape building, et cetera, certain functionality, clear height. So I think a belief that a customer can come in and just find a warehouse, particularly for a more sophisticated global customer of ours. It's often not the case and needing to build something becomes a solution that they pursue. Prologis having 14,000 acres of land under our ownership or control that we worked very hard through some slower years post COVID to get pad ready and entitled everywhere that we could, together with a very strong customer franchise, bringing those things together for the build-to-suit opportunities or like it's a very -- it's a winning strategy. And so we've been at the center of that for the last 6, 7 quarters, I would say. Last year, we had a real incredible start in the first 6 months of last year, in particular on build-to-suits and that success has continued. There's been a lot of need for larger boxes as many of you probably know. And those are a little bit harder to come by, and that's been a particular kind of subset of the build-to-suit business strength.

Sorry, sustainable?

Yes, I think so. Look, we have had on any year of starts, our average build-to-suit volume has been about 35% of our development starts, and we would expect essentially the same number going forward.

Okay. All right. Transaction markets, what you're seeing buyer appetite sellers kept pricing right now?

Yes. So the transaction markets have been strong, good, larger or maybe I should call midsized portfolios, trading, a lot of focus on where the lease mark-to-market and near-term rental growth is coming from. So it's particular slices that carry the most strength. But we would say high-quality portfolio still trading low 5s on market rents, roughly low to mid-7s on IRRs. Now it's acknowledged that the tenure has been moving a little bit. I don't know if you noticed that, Sarah. So we will see how that plays out into values. I think in the short term, that could have some effect on discount rates and IRRs in pricing. I think over the longer term, what rates are doing pinned really by what's going on inflation. Inflation will move rents and values in the longer run. So that's why we invest in real estate, many of us. It's a very good inflation hedge. But in the short term, this rate move could affect pricing. We'll see. But I think that if that were to occur, values would be on the horizon. Some time thereafter.

I don' know if you heard it this morning, and obviously, he is positioned as logistics is his largest asset class, but King Kaplan this morning was saying that now is the time to lean into real estate inflation hedge had hard asset low blesses.

I'm very glad to hear that. I hadn't heard that. I believe I think it's a very underappreciated sort of talking point right now in this environment, especially when you see the way REIT stocks have performed in the last 2 weeks. I think in our business, in particular, where you need something like 15 to 20 acres of land to bring one of our facilities. I think I would attach to that statement as their obsolescence. They're not making any more land. There's no more places to put this stuff and it all wants to be closer into consumers.

Were you as CFO when rates used to be much, much higher. Any lessons from terms of how do.

Well, I've been in real estate finance since the mid-'90s. So I've seen a number of rate environments at this point. have always been involved in hedging and addressing the financing of real estate. So yes, I don't know if there's another guest working there, but doing my best to manage through this environment.

Okay. Can we move on to data centers?

Yes.