Prologis, Inc.

Welcome to the ProLogic second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Justin Meng, Senior Vice President, Head of Investor Relations. Thank you. You may begin.

Thanks, Daryl. Good morning, everyone. Welcome to our second quarter 2024 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 other SEC filings. Additionally, our second quarter earnings press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg G, we have provided a reconciliation to those measures. I'd like to welcome Tim Art, our CFO, who will cover results, real-time market conditions, and guidance. Hamid Moghadam, our founder and CEO, Dan Letter, our president, and Chris Caton, managing director, are also with us today. With that, I'll hand the call over to Tim.

Thank you, Justin, and thank you all for joining our call. We had solid execution against our second quarter plan, which showed improvement over the first quarter underpinned by a pickup in overall market activity. In fact, we leased 52 million square feet in our portfolio, a 27% increase over the first quarter and one of our highest quarters in the past few years. This helped in delivering occupancy, which outperformed our forecast, and more importantly at rent change, well over 70%. This was achieved in an environment where decision-making has remained slow, as many customers optimize existing footprints before committing to new space. As a result, we expect many property owners to continue to prioritize occupancy in select markets with higher availability, keeping pressure on rents. That said, the bright spot continues to be the depletion of the supply pipeline and successive quarters of very low development starts. We believe we are near peak vacancy and this dearth of new supply is setting the stage for more favorable conditions in 2025. As evidenced by very strong rent change this quarter, our lease mark-to-market is serving to sustain meaningful growth through this transition. In terms of results for the quarter, Core FFO excluding promotes was $1.36 per share and including that promote expense was $1.34 per share. We earned promote revenue within our Fieber vehicle in Mexico, marking the seventh year of such achievement since its IPO, and speaking to the high quality of our portfolio and team in that market, Global occupancy at our share ended the quarter at 96.5%. Our U.S. portfolio continues to outperform the market by over 320 basis points, a meaningful spread that has widened from our historic norm of roughly 175 basis points. As vacancy normalizes in our markets, we expect this flight to quality to continue. We crystallized $100 million of our lease mark to market during the quarter. As of June, we estimate that the net effective market rents are 42% above in-place rents, representing $2 billion of potential NOI. Over 40% of the decline in our lease mark-to-market ratio is due to this quarter's mark-to-market capture. Net effective rent change was nearly 74% based on commencement and is 64% based on new signings. This metric can be volatile between quarters due to mix, but we continue to expect full-year net effective rent change to be above 70%, illustrating the outsized mark-to-market opportunity that will remain in the near and intermediate term. Our same-store growth was 7.2% on a cash basis, 5.5% on a net effective basis, each strong despite the impact of over 100 basis points of decline in average occupancy year-over-year, as well as the effect of fair value lease adjustments on net effective growth from the Duke acquisition. We deployed over $700 million into new development projects and acquisitions during the quarter and also closed on over $1 billion in dispositions and contributions at values exceeding our initial expectations. We continue to grow our solar energy business with the installed capacity of our operating portfolio now at 524 megawatts, with an additional 134 megawatts currently under construction, the total of which will generate approximately $55 million of NOI once stabilized in line with our forecast. Finally, we raised $1.2 billion of debt across our balance sheet and funds at a weighted average rate of 4.4% in a term of 11 years. Outside of this total, we also launched our $1 billion commercial paper program which has thus far saved an average of 60 basis points on our short-term borrowing costs in the U.S. In terms of our markets, there are several encouraging signs for demand, including port volumes on both the east and west coasts, as well as increased volume of proposal activity we've seen across our portfolio. While overall leasing has increased since the first quarter, the tone of our conversations with customers warrants continued caution in the near term. Even though space utilization sits near a normal range, approximately 85%, we find that many customers simply lack urgency, still prioritizing cost containment in light of an uncertain economic and political environment, both of which will be clearer soon. In the meantime, development starts remain muted and below pre-COVID levels. Quarterly completions peaked last year at 140 million square feet and are projected to approach 50 million square feet by the fourth quarter of this year. We estimate vacancies in our US and European markets will peak over the next few quarters, likely creating a shift in tone as customers assess the requirements heading into 2025. Until then, rent growth will be anemic in most markets and down modestly in some. Southern California remains its own story, where demand remains sluggish and vacancy continues to drift higher. While we've observed some green shoots over the last 90 days, we expect soft conditions to persist over the next 12 months. Globally, we estimate that effective market rents declined 2% during the quarter, with 75% of the decline attributed to SoCal. Because there is so much conflicting data available to investors, it's worth mentioning that we measure market rent growth by evaluating effective rents achieved, not asking rents before concessions, a difference that can be as wide as 5% to 10%. We'd summarize by highlighting that most of the puts and takes across our global portfolio have provided conditions that are largely stable, with reason for intermediate-term optimism due to several quarters of low starts and subdued but positive demand. Turning to capital markets, values saw modest increases in the second quarter for our U.S. and European funds. There's greater depth amongst buyers of logistics properties, and lenders are more active, together reducing yield requirements. In particular, buyer pools for well-located core product are growing now with multiple bidders back in the mix. We saw this very clearly in a large portfolio sale we closed this quarter, which was originally brought to the market last fall. Interest was reasonable at the time, but we felt pricing was off, elected to wait, and achieved 28% higher value in the end. I'd like to provide a brief update on our data center business, where we are having very good momentum across our pipeline. As you know, access to power is the key to unlocking value, and our dedicated energy and sustainability teams are leveraging our expertise in net zero carbon solutions, solar generation, and battery storage to ensure that we're in the pole position with all of the major utilities. To date, we have secured 1.3 gigawatts of power. Of this, 450 megawatts is currently under construction in $1.2 billion of TEI. 300 megawatts is in active pre-development with an expected $700 million of TEI, leaving 550 megawatts as available and currently undergoing bill-to-sue discussions. Beyond all of this, we are also in advanced stages of procurement for an additional 1.5 gigawatts, which is key to delivering on our five-year outlook for $7 to $8 billion of total data center investment. overall we've made significant progress growing this business and are optimistic about the targets we laid out at our investor day turning the guidance we are making few changes as the year is playing out to our expectations as such we're maintaining our forecast for average occupancy same store gna development starts and stabilizations there are only a few small changes otherwise we are lowering our guidance for strategic capital revenue by 10 million dollars only to account for the impact of effects rates, which are hedged elsewhere in our P&L and will not affect overall earnings. Due to the increased activity we're seeing in the capital markets and deals completed year to date, we are increasing our acquisitions guidance to a new range of $1 to $1.5 billion, and similarly increasing our guidance for overall dispositions and contributions to a range of $2.75 to $3.65 billion. Ultimately, we are increasing our GAAP earnings to a range of $325 to $345 per share, core FFO excluding net promote expense will range between $546 and $554 per share, while core FFO including promotes will range from $539 to $547 per share, a slight increase at the midpoint from our prior guidance attributed to the FEBR promote. Our core earnings guidance calls for nearly 8% growth at the midpoint, which ranks in the 87th percentile of S&P 500 REITs. We've been unique in our ability to generate leading growth over a long period of time, not only through a superior business model and portfolio, but also from our commitment to leveraging all that comes from our scale, including adjacent verticals, strategic to our core business. Our focus is simply to continue to deliver on this industry-leading and durable growth. As we close, I'd also like to highlight an upcoming event, our annual Groundbreakers Thought Leadership Forum, on October 2nd in London. The program is taking shape as our best yet, exploring the surprising intersection of logistics and health, energy, and even fashion. Additional information for the forum is available on our website, and we hope to see you there or online. With that, I'll hand the call back to the operator for your questions.