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    Prologis Inc (PLD)

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    Prologis, Inc. is a global leader in logistics real estate, operating in high-barrier, high-growth markets across 19 countries on four continents . The company is structured into two main operating segments: the Real Estate Segment and the Strategic Capital Segment. Prologis focuses on owning, leasing, and developing logistics properties, with rental operations being the primary revenue driver . Additionally, the company manages unconsolidated co-investment ventures and has launched new business lines under the Essentials umbrella, focusing on energy, mobility, and operational essentials .

    1. Real Estate Segment - Owns, leases, and develops logistics properties, with rental operations as the primary revenue driver through operating leases and property cost reimbursements .
    2. Strategic Capital Segment - Manages unconsolidated co-investment ventures, generating revenue through asset and property management services, and is capitalized through private and public equity .
    3. Essentials - Focuses on new business lines in energy, mobility, and operational essentials, expected to grow significantly in the future .
    Initial Price$112.00July 1, 2024
    Final Price$124.61October 1, 2024
    Price Change$12.61
    % Change+11.26%

    What went well

    • Prologis owns land in over 50 markets globally, with plenty of opportunities that pencil today. They have a land bank that includes covered land plays and options not visible in the land bank, indicating no shortage of opportunities for development.
    • Prologis has significant capacity on its balance sheet, with healthy and strong credit ratios. Strategic capital fundraising is improving, providing ample funding for future growth and acquisitions.
    • Southern California has a bright outlook, being a $2 trillion economy with 23 million people. Employment is up in the last year, and container imports are up 12% since 2019. High and rising barriers to supply restrict new development, positioning Prologis favorably in this key market.

    What went wrong

    • Conditions remained soft in many of Prologis's markets, with net absorption below pre-COVID levels, impacting rents. Globally, market rents decreased approximately 3% this quarter.
    • Higher bankruptcy filings are affecting revenues, with bad debt impacting revenues by approximately 35 basis points, elevated from the normal 15-20 basis points. The company expects higher bankruptcies in the balance of the year, leading to increased noncash write-offs.
    • Demand remains soft in Southern California, with Class A outperforming Class B properties. The excess capacity in this key market will take time to work through, potentially impacting rents and occupancy.

    Q&A Summary

    1. Market Rent Growth Outlook
      Q: How do rent growth forecasts align with prior guidance?
      A: Management confirms that near-term rent growth remains soft, with market rents declining 3% this quarter. They anticipate softness to persist into the middle of next year but highlight that replacement cost rents are 15% higher than current market rents. They stress that long-term earnings won't be significantly impacted and expect rent recovery beginning late next year and accelerating thereafter.

    2. Demand Recovery Timing
      Q: When will customer demand pick up and utilization improve?
      A: Management notes that customers are engaged but taking longer to make decisions due to spare capacity in supply chains. They observe that utilization has increased from below 84% at the start of the year to mid-84% now, indicating customers are working through spare capacity. They expect demand recovery to emerge late next year and accelerate into 2026, but the exact timing is uncertain.

    3. Core FFO Beat vs. Guidance
      Q: Why did you only raise full-year guidance by $0.01 despite a $0.06 beat?
      A: Management explains that the perceived beat was due to previously forecasted events, including gains from Prologis Ventures exits and tax items. They do not consider it a beat and note that currency gains were largely unrealized and hedged. Therefore, they only modestly raised full-year guidance as these events were already contemplated.

    4. Capital Deployment and Funding
      Q: How will you fund increased acquisitions and what's planned?
      A: Management expresses confidence in their long-term outlook, with increased acquisitions reflecting that confidence. They have significant balance sheet capacity and anticipate more normalized levels of capital recycling soon. Acquisitions are globally spread, focusing on markets where they seek to build additional scale. Funding will come from their strong balance sheet and improved strategic capital fundraising.

    5. Occupancy and Vacancy Trends
      Q: When does availability peak, and how will occupancy affect earnings?
      A: Management expects market vacancies to peak later this year but suggests the peak may extend into early next year due to cautious demand. Recovery is expected to emerge later next year and accelerate into 2026. They note that forecasting occupancy is challenging but acknowledge that declining occupancy could be a headwind for same-store growth.

    6. Asian E-commerce and 3PL Demand
      Q: Is increased demand from Asian 3PLs sustainable?
      A: Management confirms they are leasing with these customers and expect them to continue leasing into next year and beyond. They note that Asian 3PLs represent roughly 20% of net absorption this year. Growth is driven by shifts in business models due to past tariffs and the acceleration of Asian imports, which are up 21% since 2019. They apply rigorous credit evaluations to these customers.

    7. Digital and Energy Business Update
      Q: What's the progress on digital and energy initiatives?
      A: Management reports progress in their energy business, with over 50 megawatts of new solar starts this quarter, expanding globally. In data centers, they have 1.6 gigawatts of secured power, with 490 megawatts under construction, and are building internal capabilities. A portion of development starts this quarter includes a powered shell converted to a turnkey data center deal.

    8. CapEx Increase Explanation
      Q: What drove the jump in CapEx this quarter?
      A: The increase in CapEx is attributed to significant leasing activity, particularly in Southern California, where high rents lead to higher commissions. Property improvement expenses can be lumpy between quarters, but on a trailing 12-month basis, they are normal.

    9. Regional Occupancy Trends
      Q: Why did occupancy in Asia and Latin America decline?
      A: Management attributes occupancy declines primarily to impacts in China, with some oversupply issues in Japan. While the U.S. portfolio is stabilizing, Asia and Latin America have experienced setbacks due to regional factors.

    10. Short-term Lease Trends
      Q: Why are there more leases under one year?
      A: Management notes that some customers opt for shorter-term leases due to uncertainty. Additionally, in certain markets, they strategically offer shorter leases anticipating rent recovery and preferring to reset rents sooner.

    11. Net Absorption and Supply Completions
      Q: What were net absorption and completions this quarter?
      A: Net absorption was 40 million square feet, and completions were 63 million square feet in the U.S.. Deliveries have declined from a peak of 135 million square feet per quarter a year ago and are expected to continue declining. The under-construction pipeline is at its lowest point since 2017.

    12. Development Stabilization Guidance
      Q: Any regions driving higher development stabilization?
      A: Management states that their development book is spread globally, with no specific regions driving higher stabilization guidance.

    Guidance Changes

    Annual guidance for FY 2024:

    • General and Administrative (G&A) Expenses: $415 million to $425 million (no prior guidance)
    • Strategic Capital Revenue: $525 million to $535 million (no prior guidance)
    • Development Starts: $1.75 billion to $2.25 billion (no prior guidance)
    • Acquisition Guidance: $1.75 billion to $2.25 billion (raised from $1 billion to $1.5 billion )
    • Contribution and Disposition Activity: $3 billion to $4 billion (raised from $2.75 billion to $3.65 billion )
    • GAAP Earnings: $3.35 to $3.45 per share (raised from $3.25 to $3.45 per share )
    • Core FFO (Including net promote expense): $5.42 to $5.46 per share (raised from $5.39 to $5.47 per share )
    • Core FFO (Excluding net promote expense): $5.49 to $5.53 per share (raised from $5.46 to $5.54 per share )
    • Development Gain Guidance: $375 million to $425 million (no prior guidance)
    • Average Occupancy: 96% to 96.5% (no prior guidance)
    • Cash Same-Store Growth: 6.5% to 7% (no prior guidance)
    • Net Effective Same-Store Growth: 5.5% to 6% (no prior guidance)
    NamePositionStart DateShort Bio
    Hamid R. MoghadamChairman of the Board and CEODecember 2012Hamid R. Moghadam has been the Chairman of the Board since January 2000 and a Director since November 1997. He became the CEO at the end of December 2012 .
    Timothy D. ArndtChief Financial OfficerApril 2022Timothy D. Arndt has been the CFO since April 2022. He joined Prologis in 2004 and served as treasurer from December 2013 to April 2022 .
    Carter H. AndrusChief Operating OfficerJanuary 2024Carter H. Andrus has been the COO since January 2024. He was previously the global head of operations from January 2022 to January 2024 .
    Joseph GhazalChief Investment OfficerJanuary 2024Joseph Ghazal has been with Prologis for 23 years and became the CIO in January 2024. He was previously the Global Head of Capital Deployment .
    Edward S. NekritzChief Legal Officer, General Counsel, and SecretaryJune 2011Edward S. Nekritz has served as the Chief Legal Officer, General Counsel, and Secretary since the merger in June 2011. He joined the Trust in September 1995 .
    Colleen McKeownChief Human Resources OfficerN/AThe documents do not provide specific information about Colleen McKeown's start date or detailed biography as the Chief Human Resources Officer [N/A].
    Deborah K. BrionesUpcoming Chief Legal Officer and General CounselJanuary 1, 2025Deborah K. Briones will assume the role of Chief Legal Officer, General Counsel, and Secretary effective January 1, 2025. She has been with Prologis since 2004 .
    Nathaalie CareyUpcoming Chief Human Resources OfficerJanuary 1, 2025The documents do not provide specific information about Nathaalie Carey or her start date as the upcoming Chief Human Resources Officer [N/A].
    1. Despite noting that market rents decreased approximately 3% globally this quarter, with Southern California being a significant contributor , you've raised your acquisition guidance for the second straight quarter . How do you reconcile increasing acquisition activity with the softening rent environment, and what gives you confidence in pursuing acquisitions amid these market conditions?

    2. You've mentioned an uptick in lease commencements with terms less than one year, attributed to customer uncertainty and strategic positioning on rents . How does this trend of shorter lease terms impact your long-term leasing strategy and vacancy risk, and what measures are you taking to mitigate potential impacts on occupancy and rent growth?

    3. Given that vacancies are up and customers are taking longer to make decisions due to uncertainties, yet you reported strong leasing activity in Q3 , what catalysts do you foresee that will prompt customers to move from hesitant to more active in 2025, and how are you positioning the company to capitalize on potential demand recovery?

    4. With the reduction in your development starts guidance due to slow decision-making in build-to-suits and deferring new speculative development amidst stubborn demand , how do you plan to manage growth initiatives in light of these challenges, and what is your outlook for development activity as market conditions evolve?

    5. You've tightened and slightly reduced your net effective same-store growth forecast due to increased noncash write-offs from higher bankruptcies expected in the balance of the year . Do you anticipate this trend of rising bankruptcies to continue, and how might this affect your future financial performance and risk management strategies?

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. General and Administrative (G&A) Expenses: $415 million to $425 million .
      2. Strategic Capital Revenue: $525 million to $535 million .
      3. Development Starts: $1.75 billion to $2.25 billion .
      4. Acquisition Guidance: $1.75 billion to $2.25 billion .
      5. Contribution and Disposition Activity: $3 billion to $4 billion .
      6. GAAP Earnings: $3.35 to $3.45 per share .
      7. Core Funds From Operations (FFO):
        • Including net promote expense: $5.42 to $5.46 per share .
        • Excluding net promote expense: $5.49 to $5.53 per share .
      8. Development Gain Guidance: $375 million to $425 million .
      9. Average Occupancy: 96% to 96.5% .
      10. Cash Same-Store Growth: 6.5% to 7% .
      11. Net Effective Same-Store Growth: 5.5% to 6% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Acquisitions Guidance: $1 billion to $1.5 billion .
      2. Dispositions and Contributions Guidance: $2.75 billion to $3.65 billion .
      3. GAAP Earnings: $3.25 to $3.45 per share .
      4. Core FFO:
        • Excluding net promote expense: $5.46 to $5.54 per share .
        • Including promotes: $5.39 to $5.47 per share .
      5. Core Earnings Growth: Nearly 8% growth at the midpoint .
      6. Average Occupancy: Maintained forecast .
      7. Same-Store Growth: Maintained forecast .
      8. G&A Expenses: Maintained forecast .
      9. Development Starts and Stabilizations: Maintained forecast .
      10. Strategic Capital Revenue: Lowered by $10 million .
      11. Retention Rate: 70% to 80% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Average Occupancy: 95.75% to 96.75% .
      2. Same-Store Growth:
        • Net effective basis: 5.5% to 6.5% .
        • Cash basis: 6.25% to 7.25% .
      3. Strategic Capital Revenue: $530 million to $550 million .
      4. G&A Expenses: $415 million to $430 million .
      5. Development Start Guidance: $2.5 billion to $3 billion .
      6. GAAP Earnings: $3.15 to $3.35 per share .
      7. Core FFO:
        • Including net promote expense: $5.37 to $5.47 per share .
        • Excluding promotes: $5.45 to $5.55 per share .
      8. Core Earnings Growth: Nearly 8% at the midpoint .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Average Occupancy: 96.5% to 97.5% .
      2. Cash Same-Store Growth: 8% to 9% .
      3. Net Effective Same-Store Growth: 7% to 8% .
      4. G&A Expenses: $420 million to $440 million .
      5. Strategic Capital Income: $530 million to $550 million .
      6. Stabilization Activity: $3.6 billion to $4 billion .
      7. Development Starts: $3 billion to $3.5 billion .
      8. Sales Portfolios Proceeds: $800 million to $1.2 billion .
      9. Contributions to Strategic Capital Vehicles: $1.75 billion to $2.25 billion .
      10. GAAP Earnings: $3.20 to $3.45 per share .
      11. Core FFO, Excluding Promotes: $5.50 to $5.64 per share .
      12. Core FFO, Including Net Promote Expense: $5.42 to $5.56 per share .