The operator introduces the Prologis First Quarter 2024 Earnings Conference Call and reminds participants that the call will be recorded. The host, Natasha Law, states that the call will include forward-looking statements and non-GAAP financial measures. The CFO, Tim Arndt, will cover results, market conditions, and guidance. The CEO and executive team are also present. Overall, the company had a strong start to the year in terms of operating and financial results.

In the second quarter, the company achieved strong financial results, including raising capital and making progress in their Energy business. However, the market has been impacted by inflation and high interest rates, leading to customers focusing on cost control and delaying decision making. As a result, the company has adjusted their guidance for the year and expects lower leasing volume in the near term. Despite this, the company remains optimistic about limited new supply and a potential increase in demand in the future. In the second quarter, the company's occupancy remained high at 97%, and net effective rent change was 68-70%.

The company has seen a 50% increase in net effective lease mark-to-market, resulting in over $2.2 billion of rent to be collected. Rent growth was approximately $110 million on an annualized basis, with a same-store growth of 5.7% on a cash basis and 4.1% on a net effective basis. The company started $270 million of new developments and made progress in their Energy business. They also raised $4.1 billion in debt at a low rate and have strong liquidity. Economic data, such as unemployment and retail sales, remain strong.

Despite positive tour proposals and metrics, leasing activity and net absorption are lower than expected. This is due to factors such as the current interest rate environment and the availability of space, leading to a desire for cost containment among customers. Some larger e-commerce and retail customers, like Amazon, are still active in leasing new space. The slowdown in leasing is most evident in a few markets, particularly Southern California and the Inland Empire, and is affecting near-term occupancy and NOI.

The paragraph discusses the performance of the real estate market in various regions, including Southern California, Europe, and LATAM. It mentions the growth in rents and occupancy rates in these areas, as well as the impact of the bridge collapse in Baltimore. The paragraph also touches on the increase in valuations in most regions, except for China, and the potential for value growth in the US and Europe. It concludes by mentioning a successful equity raise in FIBRA Prologis for future acquisitions.

The company has seen an increase in transaction volumes and activity, leading to improved pricing. They are actively looking at acquisition opportunities, but their focus remains on developing their land bank. They are reducing their average occupancy guidance due to their views on demand and leasing pace. Same-store growth on a net effective basis will range between 5.5% and 6.5%, with a cash basis of 6.25% to 7.25%. They are maintaining guidance for strategic capital revenue and reducing G&A guidance. Development start guidance has been adjusted and GAAP earnings are forecasted to range between $3.15 and $3.35 per share.

The company's core FFO is expected to range between $5.37 and $5.47 per share, with core earnings expected to grow by 8%. The long-term outlook is positive, but there has been some softness in occupancy and pricing, particularly in high rent markets like Southern California. This is a combination of macro and market-specific factors.

The company is reporting a slight decrease in customer demand in the United States due to deferred decision making. They mention that about half of their adjustments come from Southern California. The next question from an analyst asks about the timing of this change in outlook, but the company states that their long-term outlook remains the same and they are confident in their future prospects. They also mention that there has been a change in the Federal Reserve's outlook in the last 45-90 days.

The speaker explains that people are hesitant to make decisions until the Fed announces a rate cut, but their views and data are always available. The next question is about evidence supporting the idea that demand has been pushed out, and the speaker mentions economic indicators, customer and supply chain momentum, and leading indicators. They also note that some customers have spare capacity and that some companies are beginning to make space, but this is not yet widespread.

The speaker believes that the impact of market shifts on 3PLs (third-party logistics providers) is not uniform across all markets. They theorize that markets with a higher exposure to 3PLs will feel the effects sooner due to their use as outsourcing and surge space. E-commerce companies, who have access to real-time sales data, were early in curtailing their demand. The speaker believes that current indications are positive and this downturn feels different from previous ones. The speaker does not believe that the word "huge" accurately describes the situation.

The speaker addresses concerns about the company's recent decline in occupancy and explains that they prefer to be early and thoughtful in sharing their outlooks. They pride themselves on being accurate and have a track record of being correct in their predictions. The speaker also mentions that they are not sure how much of the decline is preemptive and how much is a result of real-time trends. They also mention that they are not sure how much of the decline is due to developments coming out less leased than expected.

The speaker reassures listeners that there is nothing hidden in the company's portfolio and that their outlook for the next two to three quarters remains the same. They discuss an isolated event that affected margins and mention that their guidance on capital deployment should be taken with a grain of salt as they make decisions on a case-by-case basis.

The speaker discusses their company's approach to conservatism, stating that they aim to be slightly conservative but not 100% confident in their predictions. They also mention that deployment changes have a push effect on earnings. The $150 million in other real estate investments is from non-core assets. The reduction in development starts is due to various factors, such as geographic focus and built-to-suit pullback.

The company has adjusted their guidance on development due to a decrease in occupancy and operating pool. They expect to start fewer buildings as demand shifts, resulting in a reduction of $0.5 billion. The company owns land and has the resources to start $10-12 billion worth of projects immediately. The spec part of their development is the main focus of the adjustment and they are confident in their built-to-suit volume. Southern California is currently soft, but the company is confident in the recovery despite some delays. Other high-rent markets may also be weighing on the outlook.

The speaker discusses the softening of the Southern California market, with rising vacancy rates in different submarkets. The Inland Empire has the softest market for midsized and smaller units, while Orange County is the strongest. Los Angeles has a 4% vacancy rate, but as demand returns, it is likely to improve. Other soft markets include New Jersey, Seattle, and Savannah. The speaker also mentions the effect of the resolved port labor issue on the South Bay market. In terms of building size, the Inland Empire has a mismatch of older, smaller buildings compared to the larger, newer buildings preferred by tenants. The speaker also mentions that the level of demand varies by building size.

Chris Caton, speaking on behalf of the company, states that the occupancy rates have fallen the most for smaller buildings, but have grown for larger ones. He mentions that there is a wide range of markets that are strong, stable, and weak, with Southern California being the weakest. He also notes that there has been more activity among self-performing e-commerce and retailers in larger buildings. In response to a question about changes in CapEx and concessions, Tim Arndt mentions an increase in free rent.

In the last quarter, rates and concession levels have not returned to normal and are still below long-term averages. However, there has been an increase in activity and transactions in the marketplace, with deals being priced at lower IRRs. Supply chain disruptions, such as the one in Baltimore, have not had a significant impact on customer behavior. However, geopolitical risks have caused some concern among customers.

The speaker discusses the impact of rising interest rates and changing market sentiment on decision making, particularly in regards to leasing space in Southern California. They also mention the potential for a 10% swing in demand due to these factors. In the long term, demand must match supply, but the exact timing is uncertain. The speaker also addresses the impact of the port of Baltimore and compares the strength of the East Coast markets to that of Southern California.

The speaker discusses the current state of container traffic and diversions in various ports, such as New York, New Jersey, and Southern California. They mention that New Jersey has experienced strong demand and rent growth in recent years, but the future is uncertain due to pending agreements. In the short term, the speaker predicts that the ports in Pennsylvania, New Jersey, and Southern California will perform in that order, but in the long term, Southern California will be the strongest performer. The speaker also mentions that they expect soft demand in the near future and do not provide specific numbers for net absorption, availability rates, and market rent growth.

The company has lowered its demand forecast for the year and is debating whether to add the missed demand to the next two years. Vacancies are expected to peak in the mid-6s later this year, but the supply picture is improving. The company has seen a significant drop in supply and expects vacancy rates to decrease from mid-6s to 5% next year. Vacancy rates do not have a linear effect on pricing power, and even a vacancy rate of 2-3% can result in strong pricing power.

The speaker discusses the current state of the industrial real estate market and explains that when the vacancy rate reaches around 6%, it is considered to be at equilibrium. They also mention that despite a recent decrease in net absorption due to tenants becoming more cost conscious, the market is still performing well compared to previous cycles. The speaker also addresses the theory that industrial rent is inelastic and states that some demand has been deferred rather than going to other markets.

The speaker discusses the uncertain timing of when deferred demand will convert to real demand, and mentions that the market may have already missed it for the current Christmas season. They also mention the potential for demand to increase next year, but only if there is not a recession or geopolitical issue. The speaker also mentions that customers are currently looking to cut costs by utilizing available capacity, which may end once utilization rises. Finally, the speaker mentions that the three-year outlook may be slightly adjusted down and provides some numbers on the decline in SoCal market rent growth compared to other markets in the US.

The speaker mentions that they are not calling anything on '25 and '26 and that their views are upheld. They also mention that their forecast for a normalized level of occupancy may be affected this year, but they are holding out their view for '25 and '26. They then provide some numbers for rental growth and market rent growth in the first quarter, with Southern California down 6% and the US down 1.2%. The speaker also mentions that they are experiencing a decline in new leasing commencements, but does not provide a specific number.

The speaker explains that the company's retention ratios have been better, but leasing velocity on the new side is subdued. They mention that lease signings were down 12% in the first quarter and pre-leasing is not at the desired level. The speaker also addresses rent change expectations for the full year and mentions that rent change on signings was trending higher through February compared to the previous quarter. They are unsure about rent change trends for the rest of the year.

The speaker, Tim Arndt, is discussing the occupancy rates and rent changes for the company in the first quarter. He expects to see an increase in rent change in the second quarter and throughout the year. He also mentions that there may be more vacancies in larger unit sizes, but there has been recent improvement in that category. The speaker also mentions that there may be differentiation across different markets. The final question is about other landlords offering free rent or tenant allowances to attract tenants. The speaker finds this to be an interesting question.

The speaker is discussing the current state of the market and how it has surprised them. They are receiving calls from merchant developers who are in a state of panic due to their completed projects not leasing as expected. The speaker believes this is due to over-exuberance and lack of financial stability among these developers. They express their confidence in their own company's strong balance sheet and proactive approach, and see potential opportunity in the distressed state of these developers. The speaker concludes by thanking the audience and mentioning that they will continue to provide updates on the situation in the future.

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