Prologis Inc (PLD)

• 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. -

• 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. - -

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. -

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)