Prologis, Inc.

Greetings and welcome to the Prologis Second 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Abhishek Kastia, Director of Investor Relations. Thank you. You may begin.

Abhishek Kastia Thanks, Molly, and good morning, everyone. Welcome to our second quarter 2025 earnings conference call. This 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 Arndt, our CFO, who will cover results, real-time market conditions, and guidance. Hamid Moghadam, our CEO, Dan Letter, President, and Chris Caton, Managing Director, are also with us today. With that, I will hand the call over to Tim.

Thanks, Abhishek. Good morning, everybody, and thank you for joining our call. The second quarter exceeded our expectations, reflecting the strength and versatility of our team and portfolio in a challenging environment. Against a backdrop of subdued net absorption and a modest rise in market vacancy, the We outperformed our occupancy expectations and the markets, delivered meaningful rent change and same-store growth, and achieved another strong quarter in build-to-suit activity, including continued momentum in our data center business. If we were to sum up the mindset of many of our customers, particularly our largest ones, we'd say that they are increasingly looking past the headlines and what has been an evolution of their thinking over the last few months as those headlines constantly change. While net absorption has been muted, new leasing is occurring, and customer interest is promising as reflected in the aggregate size of our leasing pipeline. That same momentum is also apparent in our build-to-suit activity, which continues to grow and is well diversified across geographies and customer segments. At the same time, the supply pipeline is depleting, and development starts in our markets remain low, setting the stage for favorable conditions as demand improves. This, together with the over 20% spread we see between market and replacement cost rents, are important precursors to the next cycle of market rent growth. Turning to our results, core FFO including net promote income was $1.46 per share, and excluding net promotes was $1.47 per share, each ahead of our forecast. Occupancy ended the quarter at 95.1%, down just 10% sequentially, and further widening our outperformance to the market, now at 290 basis points. We continue to unlock our lease market to market by delivering strong rent change across the global portfolio. During the quarter, we monetized an additional $75 million of NOI through rent change, which was 53% on a net effective basis and 35% on cash. The net of this puts our lease market to market at 22% at quarter end. Net effective and cash same store growth during the quarter were 4.8 and 4.9% respectively. As a reminder, Fair value lease adjustments, which are non-cash and driven from the purchase accounting related to our 22 and 23 M&A, continue to drag our net effective same-store and bottom-line earnings growth by approximately 100 basis points. In terms of capital deployment, we started over $900 million in new development starts, nearly 65% of which was build-to-suit activity across seven additional projects in both U.S. and Europe. Beyond this activity, we have signed agreements for an additional three build-to-suits post-quarter end. Our build-to-suit starts for the first half total $1.1 billion, which is the largest start to a year that we have ever had. This strong demand by some of our biggest customers underscores our observation that many of them are moving beyond the noise and making significant capital investments into their business. $300 million of the starts relate to an incremental investment in our ongoing data center development in Austin, Texas, with a top hyperscaler. In addition to our growing development volume, we continue to procure power, adding another 200 megawatts to our advanced stages category, bringing that total to 2.2 gigawatts. As a reminder, we have an additional 1.1 gigawatt fully secured, plus 300 megawatts currently under construction. Finally, in our energy business, we continue to make steady progress toward our goal of 1 gigawatt of solar production and storage by year end, with nearly 1.1 gigawatts either in operation or under development today. While recent legislative changes in the U.S. will reduce the incentives for new projects over time, we expect the consequential upward pressure on energy prices to uphold returns. On a go-forward basis, we still see meaningful opportunity in the U.S. and remain committed to and are excited about the broader global potential of our distributed energy platform, which is expanding in its capabilities and offerings. On the balance sheet, we closed on $5.8 billion in financing activity, which included the $3 billion recast of one of our three Prologis global credit lines at a reduced spread. This facility contributes to the over $7 billion of liquidity we held at quarter end. We also expanded our commercial paper program this quarter, adding a 1 billion euro facility, which should generate an additional 40 to 60 basis points of savings in line with our experience in the US. Our strategic capital business saw net outflows in our open-ended vehicles during the quarter of approximately $300 million. Beyond our existing vehicles, our teams are at work developing new offerings more representative of the breadth of our activities, which we look forward to reporting further on in coming quarters. Let me now spend a few moments describing our markets and experience with customers this quarter. To level set, market rents declined approximately 1.4% during the quarter, and values were essentially flat. In the U.S., net absorption was subdued at 28 million square feet, and market vacancy ticked up 10 basis points to 7.4%. Operationally, we continue to see customers recalibrating, not retreating, and remaining active in signing leases, even if at a slower pace. While the full quarter of activity was modestly below normal, leasing velocity did accelerate over the months of the quarter, with June indeed the strongest. As has been the case for some time, renewal activity has been very healthy while new leasing remains slow. We're not surprised by the dynamic given the larger investment and more deliberate nature of new leasing, but we're encouraged by a series of data points across our proprietary metrics and customer dialogue, which suggest that demand is piling up and could improve greatly with some clarity out of policy and the effect it's having on the backdrop. Of those data points, first would be from the sentiment implied by our leasing pipeline, which stands at 130 million square feet, reaching historically high levels in recent weeks. We see it as reflecting both a significant interest and need for space, as well as a lengthening of the time and decision-making, which we expect to see show up in future quarters through longer gestation timing as deals get made. It's also clear that utilization both of gray space and within 3PL capacity is rising. Our build-a-soup pipeline remains full, with over 30 projects representing more than 25 million square feet in active dialogue. This level of activity underscores how larger customers, with the resources and scale to think long-term, are being strategic, consolidating operations, and positioning for growth. Finally, our broader customer dialogue simply reflects an emerging bias towards action, summarized well by one prominent user describing the exhaustion of adapting to shifting tariffs, and concluded that they need to just run their business and will quote, figure out the tariff details when there is some clarity. All told, while we expect conditions to remain choppy over the next few quarters, the market is holding up reasonably well. Looking ahead, consistent policy and settled trade arrangements will certainly help and be a key determinant of the overall pace of net absorption. Turning to guidance, in contrast to the uncertainty we faced in early April, We now see enough stability in the balance of the year to narrow and increase our guidance. Average occupancy at our share will range between 94 and three quarters and 94 and a quarter percent. Rent change should remain strong through the second half and average in the low to mid 50s for the full year. Same store NOI growth will range between three and three quarters and four and a quarter percent on a net effective basis and four and a quarter to four and three quarters percent on a cash basis. We are maintaining our G&A guidance of $450 to $470 million and increasing our strategic capital revenue guidance to a range of $570 to $590 million. In capital deployment, we are largely holding the range for net sources and uses in the year, but increasing guidance within the offsetting categories. Most notably, we are increasing development starts at our share to a new range of $2.25 to $2.75 billion, which is reflective of the additional data center start not previously guided as well as improved visibility and logistics starts due largely to our bill-to-suit success. We expect to keep up a historically higher mix of bill-to-suits over the balance of the year, and as a reminder, future data center starts are not a component of this guidance. We are also increasing our combined disposition and contribution guidance to a range of $1 billion to $1.75 billion, again, at our share. In total, our GAAP earnings guidance calls for a range of $3 to $3.15 per share, Core FFO including Net Promote Expense will range between $575 and $580 per share, while Core FFO excluding Net Promote Expense will range between $580 and $585 per share, a four and a half cent increase from our prior guidance. The higher midpoint is predominantly due to higher NOI and strategic capital revenues. To close, we're encouraged by the steadiness of the quarter and the leading action taken by many of our customers who continue to build out their supply chains amid ongoing macro uncertainty. While headlines remain noisy, the underlying activity in our portfolio reflects a market that is active and moving forward. In that context, well-located logistics real estate has proved to be a strategic asset, especially on our platform. As broader economic uncertainty begins to clear, we remain confident in the long-term trends driving our business. Our strategy is grounded in serving customers at the center of consumption, the constant in all of this, and our team continues to execute at a very high level. With that, I will turn the call over to the operator for your questions.