Prologis, Inc. Q1 FY2025 earnings call

• Prologis had a strong quarter with 58 million square feet leased, near-record build-to-suit starts, and 400 MW data center power expansion.
• Core FFO and occupancy outperformed expectations. Before April 2, industrial fundamentals were improving, but tariff uncertainty slowed decision-making.
• Dialogued with over 300 customers; 3PLs saw increased utilization, some sectors were insulated while others faced uncertainty.
• Inventory levels are likely to increase, e-commerce is expected to capture more market share, and global markets like Canada, India, Brazil, and Mexico are poised to benefit.
• Balance sheet remains in good shape with a recent Moody's upgrade.

Prologis delivered a strong first quarter. Core FFO including net promotes was $1.42 per share, and excluding net promotes was $1.43 per share, both ahead of forecast. Occupancy ended at 95.2%, down 70 basis points from year-end but better than expected due to strong retention. Net effective rent change during the quarter was 54% on a net effective basis and 32% on a cash basis, leading to net effective and cash same-store growth of 5.9% and 6.2% respectively. The company started approximately $650 million in new developments, with nearly 80% in build-to-suits having average lease terms of 16 years. Data center power capacity expanded by 400 megawatts (a 13% increase) to total 2 gigawatts in the advanced stage category. On the balance sheet, the company raised ~$400 million in new capital for funds, with ~$550 million debt issuance at a weighted average rate of 4.1%, and Moody's upgraded Prologis to an A2 rating.

Prologis maintained most earnings guidance but reduced development start guidance to $1.5 billion to $2 billion, contribution and disposition guidance to $400 million to $1 billion, and development gain guidance to $100 million to $250 million. G&A guidance was increased to a new range of $450 million to $470 million. Core FFO range remains $5.65 to $5.81 per share including net promoter, and $5.70 to $5.86 per share excluding promote expense.

• Tariff uncertainty is disrupting logistics and supply chains, slowing decision-making.
• Potential recession could impact consumption and demand.
• Customers sourcing from China-based production face uncertainty, with margin pressure expected.
• Uncertainty in capital markets and fundraising environment is affecting development activity.

Q: What lessons from prior crises serve as a guide for the current environment and risks to consumers?

A: Hamid Moghadam mentioned that while a recession would hit consumption, historical tariff impacts didn't drastically alter consumption trends.

Q: Bridge the gap on the spot occupancy decline in the quarter and occupancy cadence?

A: Timothy Arndt stated that a disproportionate number of leases rolled in the first quarter caused the drop, with retention at 73%, and the stress test shows occupancy loss as planned and more, staying low until the end of the year.

Q: Thoughts on 3PLs and the Inland Empire West?

A: Christopher Caton said Asian 3PLs in the U.S. account for ~1.5% of rent, they are growing, mitigating risks by pulling inventories and diversifying sources.

Q: Impact of Amazon being back in the market?

A: Dan Letter said Amazon is active in the market, with the e-commerce segment accounting for 20% of leasing and strong deals signed.

Q: Lease gestation and decision-making?

A: Christopher Caton said renewals can be signed 3-12 months in advance, and new leases are rapid, with some customers making decisions despite uncertainty.

Q: Stress test scenarios and rent/market absorption?

A: Timothy Arndt described GFC-like scenarios with occupancy and rent declines, and Chris Caton added absorption was 21 million square feet, with global decline mostly in Southern California.

Q: Import tariffs impact on customers?

A: William Catherwood said the average customer was prepared for ~10% tariffs, with Mexico and Brazil likely beneficiaries, and Europe possibly faring worse.

Q: Disconnected world requiring more warehouse space?

A: William Catherwood shared the Brexit example where inventory needs increased, requiring more warehouse space.

Q: Fund investors and allocations?

A: William Catherwood said denominator effect from stock market decline and private asset class liquidity issues are affecting fund allocations.

Q: UPS downsizing Amazon exposure?

A: Timothy Arndt said no impact noted in discussions, with Prologis continuing business with UPS.

Q: Smaller spaces occupancy?

A: Dan Letter said 100k sq ft and less has lower occupancy due to shorter lease terms and smaller customers, but replacement costs are high.

Q: Cash same-store NOI cadence?

A: Timothy Arndt said it's influenced by occupancy, and Hamid Moghadam noted mark-to-market and rent/occupancy are tough to predict.

Q: Leasing activity impact on occupancy guidance?

A: Timothy Arndt said it's hard to pin down a number, but reflected in the stress test occupancy drop.

Q: Tariff uncertainty resolution and demand recovery?

A: William Catherwood said it's hard to predict, focusing on the long-term market path.

Q: First quarter absorption vs market?

A: Christopher Caton said Q1 is seasonal, annualizing to ~$105M-$110M, and important to focus on customer conversations.

Q: Leasing activity impact on occupancy guidance?

A: Timothy Arndt said it's reflected in the stress test occupancy drop described.