Prologis, Inc.

Greetings and welcome to the Prologis First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Justin Meng, Senior Vice President and Head of Investor Relations. Thank you, Justin. You may begin.

Thanks, John, and good morning, everyone. Welcome to our first quarter 2025 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 first quarter earnings press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAF. And in accordance with Reg G, we have provided a reconciliation to those measures. I'd like to welcome Tim March, our CFO, who will cover results, real-time market conditions, and guidance. Amit Moghadam, our CEO, Dan Letter, president, and Chris Keaton, managing director, are also with us today. With that, I'll hand the call over to Tim.

Thanks, Justin. Good morning to everybody, and thank you for joining the call. Prologis delivered a very strong quarter. We leased 58 million square feet, a near record, broke ground on several build-to-suit developments with key customers, and expanded our power capacity by 400 megawatts to support growing demand for data centers, a 13% increase. We outperformed our expectations on earnings, occupancy, and rents. Prior to April 2nd, industrial fundamentals were improving, and had it not been for the recent uncertainty from global tariffs and their downstream impacts, we would have raised our expectations for 2025. Instead, we are electing to maintain earnings guidance as there are no policy conclusions right now to plan differently, and our severe stress test to core FFO supports the existing range. While the instability created in the last two weeks may disrupt logistics and supply chains, it will certainly slow decision making. Many companies now question where to source, manufacture, or even sell their goods. In speaking with customers, they echo this sentiment while at the same time revealing a need for flexible inventory positioning in the evolving landscape. Let's be clear, the range of outcomes is wide. We see potential for a recession, inflation, or possibly both. And let's also not dismiss the potential for a quick resolution. It's important to remember that Prologis was designed to weather any environment. We have a global footprint with a highly diversified rent roll. Our revenues are contractual with fixed or inflation-linked escalations. Our Fortress balance sheet has unrivaled access to global capital, and we are a trusted partner to many of the largest institutional investors in our strategic capital business. All of this positioning Prologis to be a partner of choice for our customers, especially in turbulent times. Before I review the quarter, let me share three high-level thoughts. First, a disconnected world will require more warehouse space, not less. Second, the current environment is an endorsement of our longstanding strategy to invest in markets where goods are consumed, not where they're produced. And third, we've built our company with the intention to not only withstand market disruptions, but to take advantage of opportunities as they arise. Turning to the quarter, core FFO, including net promotes, was $1.42 per share, and excluding net promotes was $1.43 per share, each ahead of our forecast. Occupancy ended the quarter at 95.2%, down 70 basis points from year end, which was better than expected due principally to strong retention. Net effective rent change during the quarter was 54%, and on a cash basis was 32%. As a result, net effective and cash same-store growth during the quarter were 5.9% and 6.2% respectively. Our net effective lease mark-to-market ended the quarter at 25%. with most of the sequential decline driven by the increase of in-place rents. This 25% represents a further $1.1 billion of incremental NOI after capturing another $105 million during the quarter. On capital deployment, we started approximately $650 million in new developments, outperforming our forecast with nearly 80% of the activity in built-to-suits with lease terms that average 16 years. We have been describing the Build-A-Soup pipeline as robust for some time, and in the last several months, decision-making finally thawed, which we believe highlights the need for space is real, but what has kept volumes low is confidence. We have over a dozen deals still in active dialogue today and, in fact, have signed an additional two transactions for 1.1 million square feet post-April 2nd. The pace so far this year has been well ahead of normal. In our data center business, 400 megawatts of power has moved to our advanced stage category upon agreement with utilities for projects in a Tier 1 market. We now total 2 gigawatts in this category alongside our 1.4 gigawatts of power, which is already fully secured. Our conversations with utilities and hyperscalers alike have been very productive, and we will have started activity to report for the second quarter. And finally, at quarter end, we have over 900 megawatts of solar and storage capacity, either in operation or under development, advancing us closer to our one gigawatt goal for the year. With the US and globe both in great need for additional energy production and solar as the least expensive format, we feel great about the long-term prospects of this growing business. On the balance sheet, we raised approximately $400 million in new capital for our flagship open-ended funds, yet had similar amount of redemptions, leaving the capital raise near neutral in total. We had a relatively light quarter of debt issuance with $550 million raised at a weighted average rate of 4.1%, including a Canadian bond transaction further insulating that currency exposure. Our balance sheet remains in great shape as evidenced by the upgrade we received from Moody's this quarter to an A2 rating. ProLodge is now being one of only two public REITs with an A-flat rating from both agencies. Turning to the operating environment, which I'll cover by describing conditions before and after April 2nd. The post-election uptick in leasing held steady throughout the quarter, with improving proposal volumes and conversions. We saw increased touchpoints with our global customers and higher activity levels, specifically within transport, food and beverage, consumer products, and electronics. Week by week, we were on the lookout for any slowdown in the level of interest or pace of leasing following the strong fourth quarter. And while it did not manifest in our pipeline numbers, as early tariff threats came on and off and uncertainty grew mid-quarter, we did speculate that we would see a slowdown in decision-making. With all of that being old news, let's turn to an update on the last two weeks. Well, what's ultimately announced on April 2nd clearly went beyond our early predictions, making the environment less certain. Even with the pause in some tariffs or resolution of others, customers simply lack a steady backdrop upon which to plan their businesses. We've now dialogued with more than 300 customers, including two impromptu customer advisory boards representing over 20% of our rent roll. This is what we've heard. Our customers are moving quickly to manage tariff volatility with many accelerating shipments where possible. They're also rerouting volumes and have urgent demand for overflow space. Accordingly, they are looking for short-term flexibility, and 3PLs are typically where they turn. Indeed, 3PL's FlexFace is getting more utilized, with one prominent name describing that they've increased their utilization from 83% to over 90%. Additionally, alternatives such as free trade zones and bonded warehouses are being evaluated. Our customers who are focused on food and beverage, industrial manufacturing, and essential consumer products like health and household goods are more insulated and are operating with confidence. But of course, customers selling goods with China-based production face the most uncertainty. Price increases to consumers will be passed through where they can, but margins will still come under pressure. Therefore, planning horizons are shortening and flexibility remains key. And customers like everybody are concerned about a recession where consumption and demand will be negatively affected, further shaping their response. The diversity of feedback was a good reminder that many of our customers source domestically and are relatively unaffected, while others have the capability to adapt or even stand to benefit. Whatever the scenario, our team is moving decisively to partner with our customers and meet their needs. In the last two weeks alone, we've signed approximately 80 leases for more than 6 million square feet, That's a roughly 20% dip from our usual pace, and we expect things may slow further, but it does reflect a market that's still active. Looking ahead, here are some things we expect. Inventory levels will increase as businesses stockpile and build resiliency. E-commerce is likely to take more share in an environment where product availability becomes an important factor to consumers in choosing how to shop. Global markets will become more important, with Canada, India, and Brazil among those in our portfolio that we expect to benefit. Mexico will be another, and it has stood out in terms of a growing level of interest pre- and post-April 2nd. Port markets may benefit from an immediate buildup of inventories. From there, we will need time to know how or if trade flows ultimately adjust. Nevertheless, we still believe in the long-term outlook for such markets with large population centers and significant supply constraints, a topic we'll be sharing further research on in the coming days. Finally, we believe that the inflationary effects of tariffs will only serve to increase the value of hard assets, replacement costs, and rents. Turning to our guidance, as mentioned, our first quarter results in the outlook would have called for a tightening and increase of guidance, including earnings. Given the circumstances, however, we've opted to hold most areas unchanged, with the main exception in capital deployment. We are reducing our development start guidance at our share to $1.5 to $2 billion, which reflects a reduction in our expectations for spec development until visibility improves. Our combined contribution and disposition guidance is also decreasing to a range of $400 million to $1 billion, again reflecting uncertainty in both the capital markets and the fundraising environment. In turn, we are reducing our development gain guidance to a range of $100 to $250 million. We're also increasing our G&A guidance to a new range of $450 to $470 million, in part due to the impact on capitalization from the lower development activity. Outside of this, all other areas of our prior guidance are unchanged, with core FFO including that promote expense to still range between $565 and $581 per share, and core FFO excluding that promote expense to range between $570 and $586 per share. As I mentioned, we looked carefully at our guidance in a severe stress test by examining the fallout from past crises, including the dot-bomb era, the GFC, Brexit, and the early days of COVID. GFC had the most extreme outcomes in terms of occupancy loss, rent declines, and defaults, which we mirrored and made worse by layering on additional levels of bad debt. In this scenario, we see an earnings outcome that lands at the bottom of but within our range. Anything can happen and we will reassess in the second quarter, but we feel good about the resiliency it reflects. In closing, we run the company in a disciplined way with the simple tenets to stay close to customers and invest capital accretively. So times like this do not call for dramatic shifts to our strategy. We will be attentive to our customers and we will use our balance sheet wisely. We will leverage our strengths in securing build-the-suits in both logistics and data centers. We will continue to harvest all that the platform provides in the way of profitable, adjacent businesses that support our customers. And above all, we'll empower and rely on our people whose expertise and dedication are the foundation of our success. With that, I will turn the call over to the operator for your questions.