- Core FFO (excluding promotes): $1.36 per share
- Core FFO (including promotes): $1.34 per share
- Global Occupancy: 96.5%
- US Portfolio Outperformance: Over 320 basis points above market
- Lease Mark to Market: $100 million crystallized during the quarter
- Net Effective Rent Change: Nearly 74% based on commencement, 64% based on new signings
- Same-Store Growth (Cash Basis): 7.2%
- Same-Store Growth (Net Effective Basis): 5.5%
- New Development Projects and Acquisitions: Over $700 million deployed
- Dispositions and Contributions: Over $1 billion closed
- Solar Energy Business: 524 megawatts installed capacity, 134 megawatts under construction
- Debt Raised: $1.2 billion at a weighted average rate of 4.4% and a term of 11 years
- Commercial Paper Program: $1 billion launched, saving 60 basis points on short-term borrowing costs
- Data Center Business Power Secured: 1.3 gigawatts
- Data Center Business Under Construction: 450 megawatts, $1.2 billion of TEI
- Data Center Business in Active Predevelopment: 300 megawatts, $700 million of TEI
- Guidance for Acquisitions: Increased to $1 billion to $1.5 billion
- Guidance for Dispositions and Contributions: Increased to $2.75 billion to $3.65 billion
- GAAP Earnings Guidance: $3.25 to $3.45 per share
- Core FFO Guidance (excluding net promote expense): $5.46 to $5.54 per share
- Core FFO Guidance (including promotes): $5.39 to $5.47 per share
Release Date: July 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Prologis Inc (PLD, Financial) achieved a 27% increase in leasing activity, releasing 52 million square feet in Q2 2024.
- Global occupancy ended the quarter at 96.5%, with the US portfolio outperforming the market by over 320 basis points.
- Net effective rent change was nearly 74% based on commencements, indicating strong rent growth potential.
- Prologis Inc (PLD) deployed over $700 million into new development projects and acquisitions, and closed over $1 billion in dispositions and contributions.
- The company raised $1.2 billion of debt at a weighted average rate of 4.4% and launched a $1 billion commercial paper program, reducing short-term borrowing costs.
Negative Points
- Decision-making among customers remains slow, with many optimizing existing footprints before committing to new space.
- Rent growth is expected to be anemic in most markets and down modestly in some, particularly in Southern California.
- Effective market rents declined 2% during the quarter, with 75% of the decline attributed to specific markets.
- Development leasing has slowed, and there is increased vacancy in the portfolio.
- The company expects occupancy to potentially dip below 96% in the near term due to tougher lease rollovers and longer lease-up times.
Q & A Highlights
Q: It looks like your occupancy and rent spreads improved as the quarter progressed. Can you talk about whether that momentum has continued into the third quarter, and if there are any specific markets driving that improvement? Also, can you explain the maintained occupancy guidance which implies some downside during the second half of the year?
A: Coming into the first few weeks of the third quarter, we are maintaining the momentum seen at the end of the second quarter. Proposal and leasing activity remain strong, particularly in renewals. We are achieving our rents outside of the drag in Southern California, which continues to be a market to watch. Overall, we feel good about the year despite the maintained guidance reflecting some tougher roles and longer lease-up times.
Q: Can you talk about some of the demand differences across different size ranges and geographies?
A: The healthiest part of the US is the southeastern region, with Latin America and Europe also boosting the overall global picture. In terms of size categories, demand momentum is best for sizes above 100,000 square feet, especially over 250,000 and 500,000 square feet, although there is more availability in these larger sizes. Demand is stable below 100,000 square feet, where vacancies are especially low.
Q: Can you provide some commentary on rent growth expectations for the back half of the year and the long-term 4-6% rent growth targets?
A: We expect market rent growth to be flat to modestly negative over the next 12 months, with Southern California being a significant factor. Overall, we anticipate a range of 2% to 5% decline in the next 12 months before an inflection. Despite this, we are achieving significant rent change and growth within our NOI, with a 74% rent change this past quarter, one of our highest.
Q: Can you provide more detail on the lease proposals, particularly how much of that is for new activity or vacant space versus renewal activity?
A: The chart in the supplemental is for new leasing. We see a significant uptick in nominal proposals, which is partly due to increased vacancy in the portfolio and the upcoming 12-month outlook. We added a new line this quarter to put proposal activity in the context of what is available to lease, showing a measure of 42% this last quarter, which we characterize as normal.
Q: The pace of development stabilizations seems to be tracking ahead of the halfway point of the year. How does this compare to what was budgeted in your guidance, particularly on the West Coast?
A: It was a big stabilization quarter for us. Development leasing has slowed a bit, but looking at the entire $6 billion development portfolio, we are trending to our long-term margin of 24% to 25%, which is in line with our 20-year average in the high 20s. We feel really good about our development portfolio.
Q: What impact do larger players like Amazon and Home Depot being more active in leasing have on the overall market?
A: The increase in square feet leased to Amazon and Home Depot reflects decisions made a year ago. E-commerce continues to be strong, and while Amazon was quieter this last quarter, they remain our top customer. The e-commerce segment overall continues to be a strong driver for us.
Q: Can you provide an update on the transaction market and acquisition potential?
A: The transaction market has normalized, with increased activity and multiple bidders for well-located core products. We have seen success in dispositions, outperforming across the board, and have raised our guidance. We are also excited about our acquisition volume for the year, with interesting opportunities in many markets globally.
Q: Can you discuss the retention expectations for the next 12 months and the impact of elevated concessions on demand?
A: We typically forecast retention between 70% and 80%, and expect this to continue over the coming quarters. Free rent is reverting to mean levels after a period of much lower free rent over the last few years, as the market normalizes at different paces in different places.
Q: Can you update us on your view of net absorption and rent growth projections in the context of your three-year outlook?
A: We expect net absorption of 160 to 170 million square feet for the full year. For the three-year outlook, we anticipate rents to be flat to modestly positive over the entire period, with some deferred rent growth due to the current environment. The biggest change since our 4-6% per year forecast has been in concessions, which we see burning off over the next 12 months as markets come into balance.
Q: Can you discuss the potential impact of tariffs on trade and industrial real estate in the US, and whether this affects your capital allocation globally?
A: Tariffs may lead to higher inflation, causing the Fed to relax slower, which could impact the overall economy and demand for industrial real estate. However, we do not see a radical demand shift between markets or in the overall need for our product. The primary effect of tariffs on China has already been mitigated by the China plus one strategy, with production moving to other markets.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
