The Prologis Second Quarter 2023 Earnings Conference Call began with Adel welcoming all participants and Jill Sawyer, Vice President of Investor Relations, introducing the supplemental document available on the Prologis website. Tim Arndt, CFO, and the entire executive team were present to discuss the quarter's results, market conditions, and guidance. The quarter was reported to have outstanding results across the business.

Prologis had a successful quarter, highlighted by record rent change, a ramp up in development starts, and the acquisition of over $3 billion of real estate. They earned record strategic capital income and raised $1.2 billion in new equity. Vacancies are expected to reach the mid-fours by year end, but fundamentals are expected to regain momentum in 2024. Core FFO excluding promotes was $1.25 per share and including promotes was $1.83 per share. Promote income was generated from USLF and FIBRA Prologis. Occupancy for the quarter was 97.5%, and rent change on starts was a record on both a net effective and cash basis. Net effective rent change on signings was 87%, with notable rent change from Phoenix, Northern New Jersey, and Southern California. Global markets also contributed to strong signings.

Market rents increased by 1.5% in the quarter, and in-place rents grew by 2.5%, resulting in a lease mark-to-market of 66%. Same-store growth was 8.9% on a net effective basis and 10.7% on cash. The balance sheet remains strong with liquidity of $6.4 billion and debt-to-EBITDA of 4.2x. Proposal activity, gestation, and pre-leasing of vacancy are all near pre-COVID levels and customers have been more deliberate in their decision-making. Construction starts have declined significantly, with US markets down 40% and Europe down 50%.

This paragraph discusses the current state of the real estate market in Southern California and other markets across the globe. It notes that vacancy has grown due to port operations and some customers are re-evaluating expansion in the Inland Empire. The paragraph also mentions that rent growth forecast for Southern California in 2023 has been reduced, but that the global nature of the portfolio will help to even out peaks and troughs. The paragraph also mentions that a large real estate portfolio was recently acquired and that overall activity increased slightly.

Values in Europe have remained relatively stable with a 1% decline over the second quarter. Latin America experienced a 2% and 5% write-up in Brazil and Mexico respectively while the US saw a 5% write-down. Redemption requests totaled $800 million and there was a $1.2 billion commitment for a new vehicle in Japan. Prologis Mobility has 65 lead charging sites in the pipeline and average occupancy is expected to range between 97-97.5%. Same-store guidance is 8-9.25% on a net effective basis and 9.5-10% on a cash basis. G&A guidance is between $380-390 million and strategic capital revenue guidance excluding promotes is between $520-530 million.

Prologis is increasing their forecast for net promote income to $475 million, with 12 projects commencing during the quarter. They are maintaining guidance of $2.5 billion to $3 billion for the year in terms of development starts, and $2 billion to $3 billion in disposition activity. As a result, they are increasing their guidance for GAAP earnings to a range of $3.30 to $3.40 per share, core FFO including promotes to a range of $5.56 to $5.60 per share, and core FFO executing promotes to a range of $5.06 to $5.10 per share. The company has diversified its business lines and capital sources, and has access to a variety of equity sources for their ventures.

In this paragraph, Tim Arndt reminds listeners of two upcoming Prologis events: the Groundbreakers Thought Leadership Forum in San Francisco and the Investor Forum in New York. He then directs the operator to the questions from Tom Catherwood with BTIG and Blaine Heck with Wells Fargo. Tom asks about rent growth projections in the US and Chris provides detail on which markets have exceeded or lagged expectations.

Chris Caton explains that the lease proposal trends are in line with the historical average when compared to the open availabilities. There are three drivers for this: the availabilities are low compared to history, multiple proposals on a single unit have declined over the past year, and there is some seasonality. Craig Mailman then asks for more information on the market rent growth and occupancy, particularly in Secaucus, New Jersey, Central Valley, and Atlanta.

Tim Arndt discussed that the forecast has remained in a tight range and occupancy is in line with expectations. Hamid Moghadam added that they have been pushing rents hard and have seen an uptick in the percentage of deals lost due to price, which is what they wanted. They are modulating to figure out the trade-off between rents and occupancy.

Chris Caton discusses how the labor strike in Southern California has had an adverse effect on the region, with volumes being shifted to other ports and high rental prices leading to more price sensitivity. He also notes that occupancies in the Inland Empire were very high until recently, but with more normalized occupancy levels, people may be able to find the space they need. He believes that with a resolution of the labor strike and more normalized patterns, people will be able to draw more conclusions.

Hamid Moghadam explains that the company does not care about development starts or acquisition guidance, and instead focuses on rental growth and same-store growth. He states that even with no rental growth, the company can still expect low-double-digit earnings growth over the next four to five years. He emphasizes that the company will not jeopardize their pricing power by trying to meet artificial development goals.

Dan Letter discusses the broad-based demand across all size ranges and the pockets of risk in certain markets. He states that Blackstone's portfolio is isolated from any bulk risk and they are confident in the demand. He also mentions that when looking to acquire portfolios, they are always at a discount to replacement cost due to the escalated construction costs.

Hamid Moghadam discussed the lease percentage of the development pipeline, which has dropped back to 2019 levels due to factors such as demand, supply, and rental growth. He noted that if someone had told him in 2019 that in 2023 the market would still resemble 2019, he would be happy about that. He also mentioned that 20% of tenants are not renewing due to competition on price, resulting in a lower retention rate of 70%. He did not comment on where these tenants were going, but suggested that they could be going to new supply or a new product.

Hamid Moghadam discussed the pressure on logistic costs from energy, fuel, and labor prices being more significant than warehouse rent. He also noted that a 70% retention rate is normal and that they are trying to find the efficient point for losing customers due to price. He also mentioned that they will dial back rents in markets where needed, but that decisions are made day-to-day based on data. Ronald Kamdem asked about the market rent growth forecast and Southern California, with Moghadam giving context on the first half growth and the potential for deceleration or negative growth in the market.

Tim Arndt explains that the most important thing about Southern California is the gas in the tank, which is over a 100% on average lease. He adds that there may be markets where rental growth could slide, but Southern California is still a good market with embedded growth of well over a 100%. He then states that they look at deals on a bottoms up basis and make long-term investments based on macro bets. Lastly, he confirms that the 2024 lease expirations have an estimated 80s mark-to-market and that this target still holds today.

Tim Arndt and Hamid Moghadam are discussing the portfolio's embedded NOI growth, with Arndt clarifying that the 8.5% rent growth over four years discussed previously is not the same as the same-store NOI growth. Moghadam adds that rent growth is a volatile number and that this year's same-store growth will not be affected by market rent changes.

Hamid Moghadam and Tim Arndt of Prologis discussed the $3 billion acquisition that they made and the impact it had on their full-year guidance raise. The acquisition contributed $0.05 to the raise and the remainder was from the same-store component. The two parties came to an agreement on pricing quickly without needing to involve other buyers, as both parties had a good understanding of the market.

Chris Caton explains that the 3PL business is a low margin business, so tenants in Southern California have the propensity to adjust their space needs to take advantage of the high mark-to-market in the leases. This means that tenants may take more space than they need and then sublease it for a higher return.

Southern California has seen a significant increase in rent growth over the past few years, but this is not expected to continue indefinitely. Hamid suggests that the risk premium for public and private warehouses should be higher than it was in 2019. He also notes that the lease proposal chart is in square feet, and that the trend downward may be less significant when considered as a percentage of the larger portfolio.

Hamid Moghadam discussed the differences between 2009 and 2019 in terms of vacancy rates, noting that the market dynamics are not unusual. He believes that public companies are trading at a modest discount to NAV and private values, and that once capital flows improve, this will be validated. He also mentioned that there is a 300 to 500 basis points spread in market rent growth between coastal and non-coastal markets, and that this is expected to trend in the coming years.

Hamid Moghadam and Chris Caton discuss the impact of labor strikes on coastal markets, with a focus on Southern California. They believe that Southern California will have the highest rent growth of all markets in the next five to ten years due to the mark-to-market. They also indicate that contributions have been stopped due to a lack of clarity around the values of the properties that are being contributed.

In the third quarter, the company has not been trying to make many dispositions as they are almost done with the Liberty and Duke portfolios and the Blackstone portfolio has no dispositions. The company will look at contributions in the fourth quarter in both Europe and the US, but there is no rush to do so. The process of contributions usually takes about three quarters from the downturn, which is what the company expected.

Bluebird is nearing the end of cleaning up their portfolio, but the transaction market is opening up and they are confident they will be able to dispose of what they want when they want. Blackstone's portfolio deal was focused on markets that have more embedded growth, with Bluebird prepared to pay a lower yield for those markets due to their belief in the long-term demand and difficulty in bringing new supply online.

Hamid Moghadam discusses the different economic trends in the US, Europe, and Asia. He notes that the US has the highest rent growth due to its dynamic economy. In Europe, the growth is more muted due to government control over land. In Asia, China has experienced slower growth than expected, and Japan has low rent growth but high yields.

Hamid Moghadam of Prologis Inc. has reported that there has been no cap rate expansion in Japan over the past 12 months, with a 10 to 15 basis points of compression. He also noted that cash flows in Japan are strong and that the recent portfolio acquisition Prologis announced was bought at a consistent level of valuation. He concluded the conference call by expressing his optimism for the company's future.

This summary was generated with AI and may contain some inaccuracies.