The operators welcome everyone to the Prologis Second Quarter 2024 Earnings Conference Call and remind them that the call is being recorded. Justin Meng, Senior Vice President, Head of Investor Relations, states that the call will contain forward-looking statements and that the supplemental document is available on the company's website. Tim Arndt, CFO, will cover results, market conditions, and guidance, and other executives are also present. He mentions that the company had solid execution in the second quarter, with an increase in market activity and 52 million square feet leased in the portfolio, which is a 27% increase from the first quarter.

The company's focus on occupancy has led to better-than-expected results, with rent change exceeding 70%. Slow decision making in the market has caused property owners to prioritize occupancy, leading to pressure on rents. However, the low supply pipeline and strong rent change indicate a favorable market in the future. The company's core FFO and promote revenue were both strong, and the global occupancy rate is at 96.5%. The U.S. portfolio is outperforming the market by a significant margin, and the company has captured $100 million in lease mark-to-market. Net effective market rents are estimated to be 42% higher than in-place rents, representing potential NOI of $2 billion. The company's net effective rent change was 74% based on commencements and 64% based on new signings.

The company expects strong growth in net effective rent and same-store growth despite a decline in average occupancy and fair value lease adjustments. They have invested in new development projects and acquisitions, while also disposing of assets at higher than expected values. Their solar energy business is also growing. They have raised debt and launched a commercial paper program to reduce borrowing costs. Demand for their properties is showing signs of improvement, but customers are still cautious due to economic and political uncertainty.

Development starts remain low and below pre-COVID levels, with projected vacancies peaking in the next few quarters. Rent growth will be slow and even declining in some markets. Southern California is experiencing sluggish demand and increasing vacancy rates. Effective market rents declined by 2% globally, with most of the decline attributed to Southern California. The company measures market rent growth by evaluating effective rents achieved, not asking rents before concessions. Overall, the global portfolio has stable conditions with potential for optimism due to low starts and positive but subdued demand. In terms of capital markets, there were modest increases in value for U.S. and European funds in the second quarter, with more buyers and lenders becoming active and reducing yield requirements. There is growing interest in well-located core properties, as seen in a recent portfolio sale that achieved 28% higher value than originally expected.

The company is experiencing strong momentum in their data center business, with 1.3 gigawatts of secured power and plans for an additional 1.5 gigawatts. They are also in advanced stages of procurement for more power to meet their five-year outlook. The company is maintaining their guidance for average occupancy, same-store, G&A, development starts, and stabilizations. They are lowering their guidance for strategic capital revenue due to hedging and increasing their guidance for acquisitions and dispositions. GAAP earnings are also expected to increase to a range of $3.25 to $3.45 per share.

The company's core FFO is expected to increase due to the FIBRA promote, with a projected growth rate of 8% at the midpoint. The company's annual GROUNDBREAKERS Thought Leadership Forum will explore the intersection of logistics and various industries. The company's occupancy and rent spreads improved in the second quarter, and the momentum may have continued into the third quarter. However, the maintained occupancy guidance suggests a potential decrease in the second half of the year.

The speaker is unsure if they understood the question, but they believe that the company is maintaining momentum and seeing strong activity in proposals and leasing. They are achieving their rents outside of one market, and overall, they are pleased with the way the second quarter has executed. When it comes to demand, the healthiest areas are the southeastern US, Latin America, and Europe. Demand is strongest for sizes above 100, but vacancies are low for sizes below 100.

Ronald Kamden asks about the company's rent growth, specifically in the second quarter and the expectations for the rest of the year and long term. Tim Arndt responds, stating that they are referring to effective rents and that they expect the non-SoCal markets to be flat or slightly negative in the next 12 months, with SoCal potentially seeing a 2-5% decrease before improving. However, the company's NOI has still been strong due to lease mark to market.

In the paragraph, Steve Sakwa asks Tim Arndt about the increase in lease proposals and whether it is for new activity or renewals. Tim explains that it is primarily due to increased vacancy in the portfolio and the next 12 months of overall activity. He also mentions a new line added to the chart to put the proposal activity in context. The next question from Camille Bonnel is about the pace of development stabilization and how it compares to the budgeted guidance. It is noted that progress has been made in stabilizing developments on the West Coast.

Dan Letter, speaking on behalf of the company, addressed a question about the difference between rents and underwriting, specifically in regards to new leases signed in the quarter. He noted that it was a big stabilization quarter for the company and that development leasing has slowed down. However, when looking at the company's entire development portfolio, they are trending towards their long-term margin of 24% to 25%. Dan also mentioned that the company has seen an increase in square footage leased to Amazon and Home Depot, and that the e-commerce segment has been strong overall.

The e-commerce segment remains strong for the company, with Amazon being their top customer. The transaction market has opened up and the company has had success in their disposition business, leading to an increase in guidance. They are also seeing potential acquisition opportunities, especially with closed end funds coming to the end of their lives and investors needing liquidity.

The speaker discusses the pressure from sales and industrial real estate companies to realize sales and the positive performance in this area. They mention that there has been a delay in sales due to external factors, but the transaction market is currently strong with multiple offers for portfolios in the $100-200 million range. The next question asks about retention and free rent, to which the speaker responds that they expect retention to be around 70-80% and free rent to return to normal levels.

Vikram Malhotra asks Chris Caton about the net absorption and rent growth projections for the second half of the year. Chris expects 40 to 50 million square feet in net absorption, bringing the full year total to 160 to 170 million square feet. Tim Arndt explains that the window of time for the three-year view has shifted due to current market conditions, but they still anticipate flat to modestly positive rent growth from 2023 to 2026. Hamid Moghadam adds that the main change since their previous forecast is an increase in concessions.

The speaker discusses the impact of concessions on asking and effective rents, particularly in Southern California. They mention that 23% of their rents in the next 12 months come from Southern California, while another 21% come from weaker markets. Only 56% of rents rolling over in the next 12 months are in stable or healthy markets. However, Southern California has the largest mark-to-market in the next 12 months, providing some downside and upside protection for expiring rents. The speaker also addresses the occupancy trajectory for the remainder of the year, mentioning that there was discussion of it dipping below 96% but it ended the quarter at 96.4%.

The company's 96% comment was specific about the second quarter and their year-to-date average is around 96.6%. The company believes their portfolio is of high quality and will continue to attract tenants in a softer market. The company plans to accelerate starts in the second half of the year, with a focus on logistics and data centers. They are comfortable starting spec projects in certain markets.

The speaker discusses the company's approach to building in different markets, emphasizing their $40 billion worth of opportunities and the rigorous process they use to evaluate each deal. They mention specific strong markets, such as Mexico and Northern Europe, and mention that their data center business is ahead of their five-year plan, possibly due to recent recruiting and strong relationships with utilities.

The speaker discusses the importance of having a strong balance sheet and talent in the data center industry. They also mention the current state of the 3PL market and how some 3PLs are experiencing slack in their systems, particularly in Southern California. The excess space in their networks has led to opportunities for landlords, such as the company represented by the speaker. They also mention that 3PLs serve two purposes, one being to outsource activities for other companies.

The speaker is asked about the outlook for the future and the evidence that supports their confidence. They mention several factors that could impact the market, such as wars, interest rates, and the upcoming Presidential election. They also state that they are not able to make specific forecasts given the current volatile climate.

The speaker expresses confidence in the recovery of the market, estimating that the softest markets will stabilize in 12 months. They believe that by January of next year, political and economic uncertainties will be resolved, and there will be low start volume and rising costs. They are optimistic about the long-term strength of their business. The speaker is then asked about potential tariffs and their impact on industrial real estate in the US, and they state that it is uncertain and could potentially change their global capital allocation.

The speaker discusses the potential impact of tariffs on the supply chain and consumer demand. They believe that the current focus on consumption rather than production will mitigate any major effects on their business. They also mention the potential for higher inflation and its impact on the economy and demand for industrial real estate. The speaker is not concerned about the direct effect of tariffs on China, but is worried about the second order effect on earnings calls.

The speaker, Hamid Moghadam, responds to a question about the transaction market pricing and its relation to strategic capital revenue. He mentions that their fund valuations have turned the corner and are on the good side of the cycle, while other funds may still be adjusting their values. He also states that there is a lot of money raised for industrial real estate that has yet to be spent, which he believes will be a source of capital for future transactions.

The decline in value of office buildings has put pressure on portfolios, making investors more cautious about new allocations to industrial real estate and other types of real estate. While there is an increase in new capital allocations, it is slower compared to previous cycles. The company is optimistic about the future and looking forward to Groundbreakers.

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