Prologis (PLD) Q2 2025 Earnings Call Transcript

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DATE

Wednesday, July 16, 2025 at 12 p.m. ET

CALL PARTICIPANTS

Chief Financial Officer — Tim Arndt

Chief Executive Officer and Co-Founder — Hamid Moghadam

President — Dan Letter

Managing Director, Global Strategy and Analytics — Christopher Caton

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RISKS

Bad Debt Expenses: CFO Tim Arndt disclosed, It is elevated. We're probably bouncing between 35 and 40 basis points, which is relatively in line with the first quarter, whereas our historical average is closer to 20 or even a little below, with no evidence of material improvement expected in the near term.

Market Rent Decline: Market rents fell by 1.4% during the quarter, and market vacancy rose 10 basis points to 7.4% in the U.S, reflecting muted net absorption and choppiness in leasing activity.

Strategic Capital Net Outflows: CFO Tim Arndt reported, "Our strategic capital business saw net outflows in our open-ended vehicles during the quarter of approximately $300 million."

Deceleration in Same-Store NOI Growth: CFO Tim Arndt explained, "back half of this year, we'll have more of an occupancy drag compared to 24 than the first half did. We also have some onetime items scattered around the back half, including unfavorable comps from strong onetime income in 2024 that won't be repeating this year.

TAKEAWAYS

Core FFO: Core funds from operations, including promote income, was $1.46 per share; excluding net promotes, $1.47 per share, both exceeding internal forecasts.

Occupancy: Ended at 95.1%, outperforming the broader market by 290 basis points.

Lease Mark to Market: The lease mark-to-market stands at 22%, indicating future embedded rent growth potential.

Rent Change: Rent change monetized $75 million of NOI with a 53% net effective basis and 35% on a cash basis.

Same-Store Growth: Net effective same-store NOI growth was 4.8%; cash same-store NOI growth was 4.9%.

Development Starts: Initiated over $900 million of new development, with nearly 65% build-to-suit, and signed agreements for three additional build-to-suits post quarter.

Data Center Expansion: $300 million of development starts relate to incremental data center investment in Austin, Texas, with a top hyperscaler.

Power Procurement: Secured an additional 200 megawatts, raising the total in advanced stages to 2.2 gigawatts as of quarter-end; 1.1 gigawatts fully secured and 300 megawatts under construction.

Energy Platform Progress: Nearly 1.1 gigawatts of solar production and storage in operation or under development as of quarter-end to approach the one gigawatt year-end goal.

Financing and Liquidity: Closed $5.8 billion in financing, including a $3 billion global credit line recast at a reduced spread, and held over $7 billion in liquidity at quarter-end.

Commercial Paper Program: Expanded with a €1 billion facility, which should generate an additional 40-60 basis points of savings.

Leasing Pipeline: Managing Director Christopher Caton said, The pipeline is up 19% year over year as of quarter-end. reaching 130 million square feet in recent weeks, with pronounced growth in large customer segments.

Build-to-Suit Pipeline: Over 30 projects, totaling more than 25 million square feet, remain in active dialogue as of quarter-end.

Net Absorption: Net absorption for the first half of 2025 totaled 49 million square feet; with full-year estimates expected in the 75 million to 100 million square feet range.

Guidance Updates: Average occupancy guidance tightened to 94.75%-95.25% for the full year; with rent change projected in the low to mid-50% range.

Same-Store NOI Guidance: Projected at 3.75%-4.25% (net effective) for the full year and 4.25%-4.75% (cash, full year guidance)

Strategic Capital Guidance: Strategic capital revenue guidance raised to $570-$590 million

Development Starts Guidance: Increased to $2.25-$2.75 billion at company share for full year 2025, reflecting data center additions and build-to-suit successes.

Disposition and Contribution Guidance: Updated to a range of $1-$1.75 billion (company share) for full year 2025

GAAP Earnings and FFO Guidance: Projected GAAP earnings range of $3-$3.15 per share for 2025; Core FFO including net promote expense to reach $5.75-$5.80 per share for the full year, and excluding net promote expense $5.80-$5.85, a $0.45 increase from prior guidance.

Leasing Trends: Renewal leasing remains very strong during uncertainty, while new leasing is slower, and build-to-suit demand reached career-high strength in the first half of the year.

Build-to-Suit Share: Build-to-suit starts for the first half of 2025 reached a record $1.1 billion, with continued high mix expected through year-end.

Utilization Metrics: Space utilization rose 50 basis points to 85% during the quarter, nearing a two-year trend.

3PL Demand: Third-party logistics providers accounted for about one third of leasing during the quarter, with robust pipeline growth reported for larger operators.

Lease Terms and Concessions: CFO Tim Arndt reported no significant abnormalities in lease terms, with concessions "normalizing." Unusual lease termination income during the quarter was forecasted and factored into guidance.

Geographic Performance: High-barrier U.S. markets such as Southern California face near-term weakness but may rebound rapidly, while Sun Belt and Midwest markets display improving stability.

SUMMARY

Prologis, Inc. (NYSE:PLD) delivered quarterly core FFO above internal expectations and executed record-high build-to-suit development, notably anchored by a major data center project in Austin. The company reported a diverse and expanding leasing pipeline, with 19% year-over-year growth as of quarter-end and significant activity by large tenants, particularly in space requirements exceeding 100,000 square feet. Power procurement and its energy platform advanced during the quarter, with 2.2 gigawatts in advanced stages and a solar/storage pipeline approaching the year-end target, supporting the company's infrastructure focus, including automation and data centers. Financing activity further strengthened liquidity, while the commercial paper program's expansion is set to reduce debt costs. The company narrowed and increased full-year 2025 guidance for average occupancy, rent change, strategic capital revenue, development starts, and FFO, citing improved visibility and permanent NOI gains recognized during the quarter.

CEO Hamid Moghadam stated that "every bit of business that's delayed is going to translate to more business in the future." reflecting expectations for pent-up demand to convert as macro-uncertainty clears.

Build-to-suit demand, especially from Fortune 500 companies, is driving larger project size and geographic focus, differentiating it from the slower new leasing of speculative space.

Operational metrics indicate strong renewal activity and rising space utilization, while strategic capital net outflows were addressed with guidance updates.

Regionally, high-barrier and coastal markets face short-term pressure but are positioned for potential rapid turnarounds, with international hubs like Mexico City and São Paulo cited as outperformers.

Management emphasized preparedness for increasing electricity demand from automation and EV deployment, identifying this as a long-term driver of platform differentiation.

INDUSTRY GLOSSARY

Core FFO: A non-GAAP REIT performance metric representing recurring funds from operations, sometimes adjusted for promote income or expense.

Build-to-Suit: Custom development of facilities tailored for a specific tenant's requirements, typically with long-term leases.

Hyperscaler: A large-scale customer providing cloud computing or data center services that require extensive logistics and infrastructure support.

Mark to Market: The spread between current in-place rents and market rent levels, indicating embedded growth potential.

NOI (Net Operating Income): Income generated from property operations after property-level expenses, before interest, taxes, depreciation, and amortization.

3PL (Third-Party Logistics): Logistics/freight operators providing contract warehousing, distribution, and supply chain services for other companies.

Gray Space: Space leased but not currently utilized or subleased, often cited when discussing overall market capacity and utilization trends.

Full Conference Call Transcript

Tim Arndt: Thanks, Abhishek. Good morning, everybody, and thank you for joining our call. The second quarter exceeded our expectations, reflecting the strength and versatility of our team and portfolio in a challenging environment. Against a backdrop of subdued net absorption and a modest rise in market vacancy, we outperformed our occupancy expectations and the markets delivered meaningful rent change and same-store growth, and achieved another strong quarter in build-to-suit activity including continued momentum in our data center business.

If we were to sum up the mindset of many of our customers, particularly our largest ones, we'd say that they are increasingly looking past the headlines and what has been an evolution of their thinking over the last few months as those headlines constantly change. While net absorption has been muted, new leasing is occurring, and customer interest is promising as reflected in the aggregate size of our leasing pipeline. That same momentum is also apparent in our build-to-suit activity, which continues to grow and is well diversified across geographies and customer segments. At the same time, the supply pipeline is depleting and development starts in our markets remain low, setting the stage for favorable conditions as demand improves.

This, together with the over 20% spread we see between market and replacement cost rents, are important precursors to the next cycle of market rent growth. Turning to our results, core FFO including promote income was $1.46 per share, and excluding net promotes was $1.47 per share, each ahead of our forecast. Occupancy ended the quarter at 95.1%, down just 10% sequentially and further widening our outperformance to the market now at 290 basis points. We continue to unlock our lease mark to market by delivering strong rent change across the global portfolio. During the quarter, we monetized an additional $75 million of NOI through rent change, which was 53% on a net effective basis and 35% on cash.

The net of this puts our lease mark to market at 22% at quarter end. Net effective and cash same-store growth during the quarter were 4.8% and 4.9%, respectively. As a reminder, fair value lease adjustments are non-cash and driven from the purchase accounting related to our 2022 and 2023 M&A, continue to drag our net effective same-store and bottom-line earnings growth by approximately 100 basis points. In terms of capital deployment, we started over $900 million in new development starts, nearly 65% of which was build-to-suit activity across seven additional projects in both the U.S. and Europe. Beyond this activity, we have signed agreements for an additional three build-to-suits post quarter end.

Our build-to-suit starts for the first half total $1.1 billion, which is the largest start to a year that we have ever had. The strong demand by some of our biggest customers underscores our observation that many of them are moving beyond the noise and making significant capital investments into their business. $300 million of the starts relate to an incremental in our ongoing data center development in Austin, Texas, with a top hyperscaler. In addition to our growing development volume, we continue to procure power, adding another 200 megawatts to our advanced stages category, bringing that total to 2.2 gigawatts. As a reminder, we have an additional 1.1 gigawatts fully secured plus 300 megawatts currently under construction.

Finally, in our energy business, we continue to make steady progress toward our goal of one gigawatt of solar production and storage by year-end with nearly 1.1 gigawatts either in operation or under development today. While recent legislative changes in the U.S. will reduce the incentives for new projects over time, we expect the consequential upward pressure on energy prices to uphold returns. On a go-forward basis, we still see meaningful opportunity in the U.S. and remain committed to and are excited about the broader global potential of our distributed energy platform, which is expanding in its capabilities and offerings.

On the balance sheet, we closed on $5.8 billion in financing activity, which included the $3 billion recast of one of our three Prologis, Inc. global credit lines at a reduced spread. This facility contributes to the over $7 billion of liquidity we held at quarter end. We also expanded our commercial paper program this quarter, adding a €1 billion facility which should generate an additional 40 to 60 basis points of savings in line with our experience in the U.S. Our strategic capital business saw net outflows in our open-ended vehicles during the quarter of approximately $300 million.

Beyond our existing vehicles, our teams are at work developing new offerings more representative of the breadth of our activities, which we look forward to reporting further on in coming quarters. Let me now spend a few moments describing our markets and experience with customers this quarter. To level set, market rents declined approximately 1.4% during the quarter and values were essentially flat. In the U.S., net absorption was subdued at 28 million square feet and market vacancy ticked up 10 basis points to 7.4%. Operationally, we continue to see customers recalibrating, not retreating, and remaining active in signing leases even if at a slower pace.

While the full quarter of activity was modestly below normal, leasing velocity did accelerate over the months of the quarter with June indeed the strongest. As has been the case for some time, renewal activity has been very healthy while new leasing remains slow. We're not surprised by the dynamic given the larger investment and more deliberate nature of new leasing. But we're encouraged by a series of data points across our proprietary metrics and customer dialogue which suggests that demand is piling up and could improve greatly with some clarity out of policy and the effect it's having on the backdrop.

Of those data points, first would be from the sentiment and implied by our leasing pipeline which stands at 130 million square feet reaching historically high levels in recent weeks. We see it as reflecting both a significant interest and need for space as well as a lengthening of the time and decision making which we expect to see show up in future quarters through longer gestation timing as deals get made. Also clear that utilization both of gray space and within 3PL capacity is rising. Our build-to-suit pipeline remains full, with over 30 projects representing more than 25 million square feet in active dialogue.

This level of activity underscores how larger customers with the resources and scale to think long term are being strategic, consolidating operations, and positioning for growth. Finally, our broader customer dialogue simply reflects an emerging bias towards action, summarized well by one prominent user describing the exhaustion of adapting shifting tariffs, and concluded that they need to just run their business and will "figure out the tariff details when there is some clarity." All told, while we expect conditions to remain choppy over the next few quarters, the market is holding up reasonably well. Looking ahead, consistent policy and settled trade arrangements will certainly help and be a key determinant of the overall pace of net absorption.

Turning to guidance and contrast to the uncertainty we faced in early April, we now see enough stability in the balance of the year to narrow and increase our guidance. Average occupancy at our share will range between 94.75% and 95.25%. Rent change should remain strong through the second half and average in the low to mid-50s for the full year. Same-store NOI growth will range between 3.75% and 4.25% on a net effective basis and 4.25% to 4.75% on a cash basis. We are maintaining our G&A guidance of $450 million to $470 million and increasing our strategic capital revenue guidance to a range of $570 million to $590 million.

In capital deployment, we are largely holding the range for net sources and uses in the year but increasing guidance within the offsetting categories. Most notably, we are increasing development starts at our share to a new range of $2.25 billion to $2.75 billion, which is reflective of the additional data center start not previously guided as well as improved visibility and logistics starts due largely to our build-to-suit success. Expect to keep up a historically higher mix of build-to-suits over the balance of the year. And as a reminder, future data center starts are not a component of this guidance.

We are also increasing our combined disposition and contribution guidance to a range of $1 billion to $1.75 billion, again at our share. In total, our GAAP earnings guidance calls for a range of $3 to $3.15 per share. Core FFO, including net promote expense, will range between $5.75 and $5.80 per share, while core FFO, excluding net promote expense, will range between $5.80 and $5.85 per share, a $0.45 increase from our prior guidance. The higher midpoint is predominantly due to higher NOI and strategic capital revenues. To close, we're encouraged by the steadiness of the quarter and the leading taken by many of our customers who continue to build out their supply chains amid ongoing macro uncertainty.

While headlines remain noisy, the underlying activity in our portfolio reflects a market that is active and moving forward. In that context, well-located logistics real estate has proved to be a strategic asset, especially on our platform. As broader economic uncertainty begins to clear, we remain confident in the long-term trends driving our business. Our strategy is grounded in serving customers at the center of consumption, the constant in all of this, and our team continues to execute at a very high level. With that, I will turn the call over to the operator for your questions.

Operator: Thank you. We will now be conducting a question and answer session. You may press 2 to remove yourself from the queue. To allow everyone a chance to ask a question, one moment please while we poll for questions. Our first question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Ronald Kamdem: Great. Congrats on a strong quarter. I think the release noted that the pipeline, the leasing pipeline had reached historically high levels. So I'd just love to hear a little bit more about just what the post-Liberation Day impact has been, sort of any categories to call out. And then if you could tie that commentary to the decision to increase development starts and acquisitions, how you're feeling about sort of the outlook? Thanks.

Christopher Caton: So the pipeline is promising. Even amid some of the subdued decision making like Tim described. The pipeline is up 19% year on year. One of the hallmarks here is diversity. We see good balance and good growth across different deal stages. So that's both early proposals as well as more mature negotiations. Also see a good balance and growth across different deal types. So that's both renewal and new. And we also see good diversity across different customer industries. So where's where is some of the differentiation? What are the main hallmarks of this growth is concentrated growth above 100,000 square feet. So there are more larger customers in the pipeline.

And then Tim also talked about 3PLs engaging in a greater way. Their way they're working through their spare capacity and in some leading markets really beginning to need more space. And then, Ron, on the development start front, that $1 billion increase

Tim Arndt: includes the $300 million data center start that Tim mentioned in the script.

Dan Letter: And the remainder is about half build-to-suit and half spec. We've got a very strong build-to-suit pipeline right now we're working through. It's much larger than been over the last couple of years. You heard we had a pretty strong signing. Actually, we had a record number and amount of signings there of $1.1 billion in the first half so far and a handful so far already. Before the call here in July. So and then overall, we have $41 billion of opportunities in our land bank, and most of the spec you're gonna see is gonna be outside of the U.S. That's Japan, India,

Christopher Caton: Brazil,

Dan Letter: Latin America or excuse me, Mexico, and then in the U.S., you will see maybe a couple starts in the Southeast or maybe infill coastal markets.

Operator: Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa: Yes, thanks. Good morning.

Dan Letter: Tim or Hamid, I don't know if you could provide just maybe a little bit more color on sort of the cadence of leasing. I realize April was kind of a dark time when you guys reported Q1, but could you maybe give us a sense of just the pace of leasing kind of just trying to think kind of 1Q into then kind of the April, May, June and what did that exit velocity look like in June heading into July?

Dan Letter: Steve, this is Dan. I'll start and maybe get some color from one of the other guys here. But if we take you back to ninety days ago, on the call, we actually talked about volume being 20% down from normal. This was two weeks after April 2 and the tariff surprises. So call that maximum uncertainty time. And we actually quoted that number to highlight how much volume was actually happening despite the tariff surprises. Unfortunately, I think that did create some confusion and that's not a stat that we're gonna continue to give looking at too short of a duration over a quarter is not really indicative of a trend.

What we saw happen throughout the rest of the quarter was acceleration through May and June, and then the quarter ended up only down about 10% from normal.

Christopher Caton: And so just in terms of what we're seeing over the last couple of weeks, Tim shared the color in his remarks. And so we really try to zoom out and look at a wider range of metrics. So it is lease signings, like you asked, It's also the pipeline like we just covered. It's the build-to-suit dialogues. It's the customer engagement. We really take a full picture approach to be sure we're giving you a complete update. Thank you.

Operator: Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows: Hi, everyone. I guess, was wondering if you could give us some more details on the guidance. So Tim, you mentioned that higher NOI and strategic capital drove the midpoint FFO guidance increase. But I guess with occupancy expectations unchanged despite the stronger 2Q, it also seems like pricing is kind of in line with expectations. So any more details on that kind of what's better than previously expected?

Tim Arndt: Sure. I mean, the environment for one has just calmed pretty significantly since April. We also have a shorter number of months left in the year, obviously. So we have improved visibility that gives us a lot of confidence in the guidance, both the increase and also reflected in the narrowing. I referred to some outperformance in the quarter. If you recall back to April, we all cited outperformance there even though you know, we opted to leave guidance in place, at that time given the headline. So a few of those pennies are permanent to the year is the point there.

The remainder coming out of NOI is reflected in same store despite the same midpoint, which is really, once again, narrowing of the range expressing more confidence. And then within that 50 basis point range, our belief that we're just gonna land at the stronger end of it by the end of the year.

Caitlin Burrows: Thank you.

Operator: Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Michael Goldsmith: Afternoon. Thanks a lot for taking my questions. Customer dialogue and data points seem to be supportive of demand building, but you also said that you expect conditions to remain over the next few quarters. So how are you thinking about the timing of the growing pipelines translating to signed leases? And is there anything in particular that it would take to kind of convert this pipeline into signed leases? Thank you.

Christopher Caton: Hi, it's Chris. I'll jump in and some of the other guys may as well. Look, decision making remains deliberate and so we see the pipeline building, Tim, just described a dynamic of the deals beginning to pile up. And when we speak with customers, this is really about clarity on the macro front. And when we look at the headlines, when we look at economist forecasts, there's caution. The back half of the year. And so we will see this play out over the balance of the year and that's what that's what we're really paying attention to.

Hamid Moghadam: Like, we've been in a condition of constant uncertainty, and I know that's a favorite word in the financial industry, but having done this for a long time, you know, last year it was all about, you know, Ukraine and whether the Fed was going to cost, I guess, going back eighteen months, that was the uncertainty. Then, when the election was settled, there was a lot of excitement about, pro business policies and the like. And then basically, you had April 2, the liberation date. So I mean, it is very, very difficult to predict anything for any length of time. With every passing day, there's more water building behind the dam.

And we're seeing evidence of this with the largest customers. They just can't basically go to sleep, without taking more sleep, more space. So that's what you're seeing is their ability to defer is getting reduced. With every passing day.

Michael Goldsmith: Thank you.

Operator: Our next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Tom Catherwood: Thank you, and good afternoon, everybody. Maybe Tim or Chris hoping you could help us square up the leading indicators as space utilization is moving higher and proposals are up. Lease gestation is down, but the IBI activity index dropped to the lowest level since the first quarter of 2023. What is driving the bifurcation between these metrics? And kind of how should we think of them as an indicator going forward?

Christopher Caton: Yeah. You do need to take a sort of full picture view of all these different metrics. And given the volatility, Hamid just described, they're each gonna depict different things. And also, please in please keep in mind, some are retrospective and some are prospective. And so you ask after some of our customer survey data that you see in the supplemental there, I think they're doing a good job of describing the landscape. So, for example, utilization, that built in the quarter, 85%, up 50 basis points. That's a meaningful increase and is approaching a two-year trend. And this is reflecting both growth in the supply chain as well as some inventory build.

Now at the same time, the IBI activity index measures that velocity, the product moving out. That has moved lower and it's consistent with the softer economic climate, this uncertainty. Well, the third point which we've already covered on the call is simply the pipeline building and customers measuring how they make decisions in this landscape.

Tom Catherwood: Thank you.

Operator: Our next question comes from the line of Craig Mailman with Citi. Please proceed with your question.

Craig Mailman: Hey, good afternoon. I just want to kind of circle back, I mean, your comment and just some of the other comments in the call about conversations with tenants where you know, the water is building, the dam is getting more full and on the one hand, have the tariff uncertainty. On the other hand, you had the OOBBB bill pass, which is stimulative. You have some accelerated depreciation there, so you have some offsetting forces and your leasing pipelines at the highest rate it's ever been.

I just how at what point do you think a larger percentage of tenants just become comfortable being uncomfortable with the uncertainty and have to run their business and you know, really that logjam starts to break. I'm just trying to get a sense as we head into the back half of this year and into next year, right? How this could trend, particularly from a net absorption perspective where even with things kind of being uncertain and choppy, you guys, you know, you held average occupancy steady. You're through, you know, part of your expiration schedule and it sounds like on the build-to-suit side, the new leasing side, you're starting to get some momentum.

So, you know, I don't want it sounds like you guys are trying to maintain some discipline around setting expectations. But if you had to kinda couch it, on the high and the low end of your probabilities of things really accelerating here. In second half into, you know, first half of next year. Kinda where do you peg that given all the conversations that you're having with tenants?

Hamid Moghadam: I think I understand the question. Basically, I'll speak for myself. I don't really care about the next quarter or the following quarter because it's so dependent on what comes out of Washington. And people make these decisions in the short term based on emotion. But I do know is that we have a very significant mark to market. I know that there is shortage of labor coming up in the construction industry because of the immigration policies. I know the government is spending a lot of money on chip plants putting extra pressure on demand for construction. All this data center stuff, and all this stimulus that's gonna come in from ITCs.

So to make a long story short, I'm very comfortable when we take two, three, four years out given the escalation in replacement cost and you know, rates are not gonna go through the floor. So the rates times replacement cost gives you the rents that you expect in the long term. But I don't know what the path to that will be over the next quarter or two. It's just not the way we run our business. Maybe you guys are giving us more credit about having that clarity than we deserve. So I feel great about the business. I think every bit of business that's delayed is going to translate to more business in the future.

And one other concept I'll throw out at you, and those of you who've been listening to us for probably too long have heard this, in good markets, people are 10 to 15% more optimistic. In markets that are choppy or risky, they're 10-15% more pessimistic. That's a 30% swing. That immediately goes the other direction when two tenants compete for the same space and one of them loses out and then loses out again. So FOMO is big factor about people's confidence to move on. And generally, I've found that people take more comfort in being, among other people, making the same sort of decision than being somewhat contrary.

So equally long answer to your question, but there you have it.

Operator: Thank you. Our next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.

Ki Bin Kim: Thank you. Good morning. Regards to the 136 million square feet of leasing proposals, I was wondering if you can provide some more color around it. For example, like how much of that is renewal versus net incremental demand? And historically, what has your conversion rate been in this comp proposal basket? And, ultimately, I'm just trying gauge going back to the building level of wall in the water, you know, behind the dam, you know, how much how much that could actually net impact Prologis, Inc. going forward?

Hamid Moghadam: So let me give you a perspective and then the other guys can throw in the more specifics around it. I think of leasing as having three components. One is renewal leasing, and that tends to be very, very strong in times of higher uncertainty because the best easiest decision to do is to make do with what you have and just kick the can down the road until you really have to make the decision. So that part of our business is much stronger than normal. Then there is new leasing, which is somebody all of a sudden deciding that they need more space because they didn't think about it two years later.

To go after a built to suit, two years earlier to go after a built to suit. And that business is, is slower than normal for sure. Because if every time you move, you gotta buy new equipment, new you know, refitting your space. Probably hiring some new employees. It's a very expensive proposition. And in a choppy environment, you're do less of that than just kicking the can down the road. And then there's finally built to suit activity which I'm gonna go on a limb and say this is the strongest it's been in my career.

So you know, people who can plan in the long term are also, I think, thinking the way I'm thinking about it, which is they're looking out a couple of years by the time these projects are fully operational and they look at the factors driving the long term health of their business, like ecommerce and things like that, and they're feeling good about it. So the only part of our business that's that's slow is leasing of spec space.

Christopher Caton: Hey, it's Chris. I'll just jump in on some of the details. And I'd also point you to my earlier remarks on the pipeline talking about it's up 19% and there's really good balance. And so the growth rates are sort of similar across multiple of these metrics, whether it's new versus renew, whether it's early proposals versus mature negotiations, I talked about size being a difference. That's one area where larger deals just take longer to come together. And so you're going to see that represent an outsized share. Doesn't take anything away from the fact that the larger scale requirements are the things that are really lifting the market today.

Hamid Moghadam: Well, the build to suit market.

Christopher Caton: Yes.

Ki Bin Kim: Thank you.

Operator: Next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.

Vikram Malhotra: Thanks for taking the question. Good afternoon. Maybe just for me, the question just stepping back, I understand sort of quarter to quarter is but just looking out sort of two, three years, with call it seven and a half percent vacancy, the Japanese you've referenced, in this environment, what scenario do you see sort of rents inflecting or real rent growth what do you think sort of a normalized net absorption is for the industry? I'm just sort of wondering, given we've seen a massive increase or I should say a decent pickup in vacancy. And I'm just trying to whether an inflection is this month or next year.

I'm just trying to figure out how you think about the next two, three years given where vacancy is, and do we actually see, you know, pricing power?

Hamid Moghadam: Yeah. I think vacancy rate of, seven four point four is pretty close to where you're gonna see the peak in this cycle. Absent some calamity. We may have another two or three quarters of bouncing around 10 basis points here or there, I think you're essentially most of the way to where you're going to end up between the high threes where the trough was and the mid sevens, let's call it, where I think this is gonna end up. As to when you really get pricing power, is where that number comes down to around 5%. That's historically been the magic number. By the way, 7.4% is almost the median vacancy rate since February. Just think about this.

Putting aside COVID years with supercharged what you may call it, e commerce absorption, it is seven four is a is a norm in this business pretty much. In fact, to be precise, 44% of the time, the vacancy rate in the last twenty five years has exceeded 7.4%. So we are we are just spoiled by having come out of an environment where we've seen high 3% vacancy rates and by the way, 3% unemployment rates. And now we're kind of really getting wigged out because unemployment is in the low fours and vacancy rates are in the in the seventh. This is pretty normal.

I think when we come down to 5%, it's we're get really good pricing power above inflationary pricing power. And just figure that the market I mean, Chris will walk you through our best guess. But I kinda think of it as a as a business that grows at one and a half to 2%. So in a normal economy, when you don't have you know, all kinds of noise coming out of different places, it should take a year or two. For it to normalize to 5%, which is the equilibrium vacancy rate. Because we can predict deliveries pretty closely. So really, the only variable is demand.

And I don't know exactly what the demand numbers are gonna be, but at some point, they're gonna center around the norm, which is about two fifty million feet. They're not going to go to three seventy five where it was during COVID. Because that was driven by a onetime really big shift. I think you heard me talk about it at that time. We got six years of growth in six months. We're still growing. Off of those higher numbers. But I can't think of another situation where we're get six years of growth in six months. So mid to hundreds, a year or two. You're gonna get pricing power.

And when you do, it's gonna be really above inflation in the short term because the pipeline hasn't started. Construction costs have been going nuts, and I think they're going to continue to go up. So there you have it.

Vikram Malhotra: Thank you.

Operator: Our next question comes from the line of Nick Thillman with Baird. Please proceed with your question.

Nick Thillman: Hey, good morning out there. Maybe just Tim question on bad debt. I think in June you referenced that was trending better than expectations on that end. But maybe just an update here through 2Q just kind of with the macro uncertainty. And then anything you're seeing whether it be in the space size or the type of business where tenants are having a little bit of credit issues? Thanks.

Tim Arndt: Yeah. That was relatively in line with the first quarter. It is elevated. We're probably bouncing between 35, 40 basis points where I think our history is closer to 20 or even a little below. The other reference point on all of that is the height that we've seen during the GFC, which was up into the fifties. I'll expect something on the order of 40 over the balance of the year as we still watch TenantHealth, Which We Are Keeping A Very Close Eye On. With Regard To Particular Industries, I Mean, Nothing That I Would Really Build A Thesis Around. It's Some Larger Customers At Time.

Feel Like There's A Little Bit Of A Balance To Southern California, a little bit of a balance to larger users. Home oriented, but not enough to really break out into its own category.

Hamid Moghadam: I think the strong retailers are in the offensive. And I think probably in the retail sector, you've got the biggest difference between winners and losers. And, winners are just taking share. One other thing about credit losses that's important to keep in mind, this is the first cycle I've seen where this is happening. In that the mark to markets have been so large that the defaults that we've had every single one actually, I shouldn't say every single one, but in aggregate, have been NPV, NPV positive. Not negative. Because our opportunity to capture the higher market rent earlier than we thought makes up for more than the downtime that we experienced.

So, yeah, maybe a short term earnings impact, but it's not a value impact or even a long term earnings impact.

Nick Thillman: Thank you.

Operator: Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck: Great, thanks. Hamid, I thought your answer to Craig's question earlier was helpful. Hopefully, got this right, that you talked about the differential between those markets where tenants are comfortable and those that are choppy and how FOMO can change that very quickly. I guess, there any specific geographical markets that you think could flip most significantly from being choppy to getting more competitive and maybe how quickly that could happen?

Hamid Moghadam: I think by Chris is gonna give you the names. But by definition, it's the markets that have strong long term fundamentals and have taken the biggest hit in the short term. I. E, Southern California. Because a lot of people kinda like two quarters ago thought Southern California was gonna fall into the ocean and everybody was gonna go out of business. So there was very little FOMO, whatever the opposite of FOMO was. There was a lot of that. And think once a couple people started losing deals in Southern California, and they see the stuff coming through the ports, ain't gonna come from Kansas. I can tell you that. No.

It may cut not come from China, but it's gonna come from somewhere else. I don't want mean to pick on Kansas. But I think as soon as they see that, then lose a couple of deals. I think you'll see that market bounce. Because it's bouncing off of an exaggerated bottom. So by definition, that will be a big bounce. Chris, do you wanna add I think maybe another part of this question is what are the really good markets today?

Christopher Caton: Excellent. Yeah. No. I'd I'd underline the point that we see secular outperformance in these high barrier geographies, and they can really move quickly. Are the outperforming? What are the underperforming geographies? Well, for sure, international. Is the theme, whether it's Europe, whether it's Latin America. In particular, the consumption centers there like a Mexico City and a Sao Paulo. And then turning to The United States, we've had this those being good. Those being good. Thank you. Yes. And we'll in some cases, already are doing this hockey sticks, for example, in Brazil. A favorable hockey stick.

The United States, we still are going through this transition period, this sort of post pandemic normalization where the interior markets outperformed last year remains a trend this year. But what's changing are a couple of things. Number one, not all coastal market markets are created equal. So SoCal is weak, but Southern Florida Washington, D. C. Are examples of greater resilience. Then across some of The United States, we've seen better stability in the Midwest, so geography Indianapolis had to contend with excess supply and it's working through it. And then across the Sun Belt, there's been some excess supply, but we're seeing those markets work through it as well. Dallas comes to mind.

The leading submarkets there are really firming. So you're starting to see a transition across a range of markets.

Hamid Moghadam: I think Houston and Nashville are pretty strong.

Christopher Caton: Absolutely. I left those out. Houston, Nashville, Atlanta. Thank you.

Operator: Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Mike Mueller: Yes, hi. I guess, sticking with markets, do you think any tariff dynamics will cause you to pivot back? To some of the regional markets that you sold out of following the A and B merger?

Hamid Moghadam: Ever. Probably. But the one that we did come back to, I'm not sure was a great idea. To be perfectly frank with you, which was Savannah. And we kinda got ended up back in there with the with the merger. It was a conscious decision. But we thought about it hard about whether we should stay in or not stay in, and we decided stay in. And I think our earlier decision was actually the right one. I think it's not fundamentally a long term strong market. Notwithstanding its very strong and well run port. But, you know, that's nothing. I mean, that's less than one tenth of percent of our business that think of that way.

So I don't think so. We've been in and out of Atlanta of Tampa a couple of times. I think we're feeling better about Tampa these days than we did before. We've been in and out of Minneapolis a couple of times. We're not going back in. Ben, what do you think? No. I think we're in 31 markets in The United States. We're in up seventy five. Consumption centers globally. I think that accounts for about 78% of the world GDP in those markets. I think we're in the right markets and we're gonna stay focused there.

Mike Mueller: Thank you.

Operator: Our next question comes from the line of Samir Khanal with Bank of America. Please proceed with your question.

Samir Khanal: Thank you. Good afternoon, everyone. I guess along the same lines as the last question, Dan, took up your acquisition guidance. Talk about broadly the opportunities you are seeing on the transaction side. Anything can provide on pricing? And even from an underwriting standpoint, like what are you underwriting for occupancy and rent growth? Over the next few years given the tariff uncertainty, etcetera? Thanks.

Dan Letter: You know what's been interesting is just how resilient the overall Transmark transaction market has been, you know, especially since April 2. There's a lot of capital that was sitting on the sidelines. It's out there very active right now. Chasing right down the fairway, high quality, well located, assets with a higher wall than people were looking for over the last couple of years. So what we've been focusing on really is more value add acquisitions. We're not interested in chasing those core returns down into the low sevens, which is where we're seeing them today. We're our teams are turning over opportunities a 150, 200 basis points better than that.

Whether it be a broken development or just some vacancy and but certainly not as many opportunities as I was as I would hope for. Our focus on the deployment front is really, like I said earlier, it's data centers, it's build to suits, and then some spec where the market fundamentals make sense.

Hamid Moghadam: Yeah. The only other thing I would add to what Dan said is that in Europe, returns are in the low sixes, actually. So that market is even more expensive than The US market.

Dan Letter: IRRs.

Samir Khanal: Thank you.

Operator: Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.

Vince Tibone: Hi, good morning. Cash same store guidance implies growth will decelerate to about 3.5% in the back half versus mid-five percent growth in the first half. Could you just discuss what's driving that deceleration just given spread and occupancy trends or pretty solid, and, you know, it seemed to you know, the building blocks would seem to imply growth would be stronger than three and a half percent in the back half. Like, I guess, what's the kind of what's the headwind in the back half? You can just kind of provide any color there would be helpful.

Tim Arndt: Yeah. Hey, Vince. It's really about comps in the end. One note before getting into that detail is while rent change remains very strong, you look back at the levels of rent change that we've had the last two or three years. Is coming in at lower amounts. So those contributions to same store growth will normalize, let's call it. But more specifically, the back half of this year, we'll have more of an occupancy drag compared to 24 than the first half did. We also have some onetime items scattered around the back half, which deal with unfavorable comps where we had some strong onetime income in 24 that won't be repeating this year. There's recovery noise in there.

So it's actually a reason I would encourage you. I understand the analysis you performed. But you do need to widen out to a full year most times to get a full picture, and I would point to our, guidance there.

Hamid Moghadam: Yeah. The other thing, Vince, that's going on is that we've put away a lot of the uncertainty in the second half. So we already know the answer to those questions for second half deals. And obviously, there's a lot of mark to market to a lot of these deals that drives same story NOI, but most of those have been captured. Or locked in for this year bigger portion of the second half than obviously at the beginning of the year for the first half. So that's another dynamic.

Vince Tibone: Thank you.

Operator: Our next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.

Brendan Lynch: Great. Thanks for taking my question. Hamid, your commentary on market vacancy was helpful. In terms of your portfolio, Asia occupancy was up quarter to quarter, but the other regions were down. Can you update us on your expectations for a second half inflection in occupancy and any considerations for the specific regions?

Hamid Moghadam: Well, China is definitely, I think, past bottom and it's getting better. And yes, the numbers there can move around a lot because occupancy I don't actually know exactly where it is, but probably has a high eight, low nine in depending on the market we look at. There is the biggest opportunity for pickup there, and it's been in the dumps for the last three years. And Japan is much more stable and predictable. But China has been have moved down quite a bit. The point is the China numbers don't actually move our numbers because, because of our share. So but that market, I'm feeling better about.

Christopher Caton: Yeah. Hamid's point, I'll just pile on, is also the same point that it's small. Also a reason that it's occupancy can appear a bit more volatile. And we've had some good success this last quarter getting chunks of the portfolio leased up, and that describes its increase.

Brendan Lynch: Thank you.

Operator: Our next question comes from the line of Jonathon Petersen with Jefferies. Please proceed with your question.

Jonathon Petersen: Great. Thank you. Maybe slightly different topic here, but as we see more automation in warehouses, I understand that this requires more power than legacy warehouse use cases. So can you talk about how prevalent those higher power demands are in just the space demands today and how you guys are managing it? In this power constrained environment as you guys know from your from your data center business?

Hamid Moghadam: Well, you know, the number that I carry around in my head, the approximately correct, is that the power demands of a regular warehouse, not a temperature controlled warehouse, are about five kilowatt hours per square foot. And we think with full automation, and EV charging of forklifts and maybe some light trucks. Over time, that can get to 25. So that's a pretty significant 5x type of increase. Everybody talks about data centers being an issue and demand on the load of the system. But automation, as you point out, is going to be also a very big driver. And, yeah, I know the EV business is kind of slow these days and policy has changed quite a bit.

But look at the rest of the world. That business is growing very rapidly everywhere else. Just not here because of policy. So that's a third leg of that demand. Driver. If you will. So I think everything points to, the price of electricity going up and the utilization of electricity increasing in pretty much everything.

Dan Letter: And maybe I'll pile on here. We're way in front of this. We've actually launched a new behind the meter energy generation solution. This is actually stemming from the expertise that we've gained through this mobility with microgrids, actually. So this is not a revenue generating business yet. We've got a big pipeline, and it's a very strategic growth area for us. It's It's really bridging the gap as the utility continues to struggle through exactly what Hamid just described here, which is keeping up with the demand for both logistics. And data centers.

Jonathon Petersen: Thank you.

Operator: Our next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question.

Greg McGinniss: Hi. This is Greg McGinniss on with Nick. We're just hoping to dig a bit more into the source of demand that you're seeing. You know, who are the end users right now? How does that compare to the last few years of demand? And on the build to suit side, is that a similar makeup, tenant demand? And why do you think they're choosing build to suit over currently vacant space?

Christopher Caton: Hi, it's Chris. I'll jump in. I think Dan will have some remarks as well. As I look across customers that are active, the hallmark here is diversity. There are a couple of categories we've been talking about that though are part of this demand growth, this demand acceleration. Things we've been talking about like basic daily needs, so think food and beverage, We've also been talking about the importance of ecommerce and the retailers taking share. And then we are seeing increased incidents of sort of light manufacturing, light assembly. Requirements. Those are the sort of obvious drivers we've been talking about in the past. You know, less obvious, we've had very active dialogue in leasing with auto customers.

Customers. Which might surprise you. It's more on the spare parts or the replacement parts and tire side of the business as consumers maintain aging. From companies, the 3PL component is beginning to work or has begun to work through that spare capacity is beginning to need more space. And as to make up to the makeup of the build to suit pipeline, and what we've signed this year, these are real these are large These are Fortune 500 customers that can see through the short term noise and they're making long term decisions. The buildings themselves are actually all pretty big.

We're seeing them really focus on large buildings, even, you know, million, 5,000,000 plus And there's not a lot of specs sitting out of the market for buildings of that size. And then, of course, it becomes locational. There may be vacancy in one side of the country, and then they need to be in other locations. So we're finding our 14,000 acres of land that we own or control is a differentiator for us there. And we're we're capitalizing and taking our more than our fair share. Thank you.

Operator: Our next question comes from the line of A. J. Peak with KeyBanc Capital Markets Inc. Please proceed with your question.

Todd Thomas: Hi, it's Todd with A. J. Question for you, Tim. You mentioned net absorption was 28 million square feet in the quarter. I think that compared to 21 million square feet in the first quarter, so $49 million so far. The first half. Do you have an updated view for the full year? And then Dan, on the 3PLs, can you provide a little bit more detail about 3PL lease activity in the quarter and comment how you see leasing demand trending for 3PLs going forward in the near term?

Tim Arndt: You've got your numbers right. So year to date net absorption is 49 million square feet. Let's pause and reflect that's a really good result. Given the uncertainty that's played through the marketplace over the last six months. Now as we talked about in the back half of the year, it's prudent to monitor that uncertainty, that macro caution. And so I think full year numbers should land in the 75 million to 100 million square feet. Range.

Dan Letter: Yes. Then on the 3PL front, we are hearing from our customers and seeing in the pipeline that they're making their way through the gray space. And looking for incremental space. We're seeing this mostly from the larger three PLs, Many of them are unfazed by all the noise in the macro picture. But we're definitely hearing the confidence, and we're seeing that pipeline grow. The three p l's accounted for about a third of our leasing. In the in the second quarter, which is slightly down from the prior two quarters, but those were two quarters in a row of records.

Todd Thomas: Thank you.

Operator: Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

John Kim: Thank you. I was wondering if there were any changes to terms of leases signed the second quarter since Liberation Day. Terms of annual escalators or TIs and free rent? We haven't noticed much on commencements, which was disclosed, but other than term, maybe coming down a bit. And also wanted to see if you had any commentary on the $28 million of termination income. Whether or not you expect more in the second half of the year?

Tim Arndt: Sure. You know, with regard to terms, I mean, if you see the lease terms provided in the supplemental, you'll see a lower number there in the context of months. That's mostly a reflection of mix because if look above there, you'll see a lighter volume of development leasing in there. I haven't seen anything abnormal develop with regard to overall lease term length. We've been saying that concessions are normalizing. Which, does continue, and you've also see that reflected in the materials, this morning. With regard to the, lease termination fee income, we typically have on the order of $5-10 million of such income in any quarter. This quarter was a little bit higher.

I would remind you as you're looking at an item like that, you're you're seeing one side of it what you don't see is there's resulting vacancy clearly, which winds up, impacting the balance of the year that those kinds of knock on effects are all reflected in our guidance. So that was an unusually high item in the quarter. It was forecasted and in our previous guidance. And so everything with regard to same store and earnings will be in good shape for the balance of the year.

Hamid Moghadam: Yeah. And those payments are exactly what I was talking about in comparison to any downtime that we may experience with tenant defaults and all that. So that number unlike other cycles, I think, is going to continue to be positive. In a good plan.

John Kim: Thank you.

Operator: And our last question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Jamie Feldman: Great. Thank you for taking the question. Hamid, you listed a long list of fears prior fears over the last eighteen months or so that have gone away. As you talk to your as everyone talks to their clients today, economists are calling for a much better twenty six. What do you think the key overhangs are on decision making and just people getting more aggressive? You would mentioned kind of the dam and water building up behind the dam. What is it what do you think the overhangs are that need to go away or that people are optimistic about in terms of much better times ahead and leasing more space and growth?

Hamid Moghadam: Palmer. I think if you have people that are pulling the trigger on big capital improvement or capital expenditures, they're going take comfort by seeing other people make the same decisions. So, you know, people want to be in company just like investors wanna beat the index, but wanna be in good company. So I think that dynamic and that and will shift from being very concerned conservative being much more aggressive. I think there's still a degree of worry out there as to are we in an inflationary environment or are we not? The, you know, tariffs would argue that you're in an inflationary con economy. But the numbers haven't come through that way.

There's a lot of confusion right now. That's why I think it is nearly impossible to predict things quarters in advance. I know you want us to, but it's kind of hard to do it than anything I should tell you, you should ignore anyway. So, I'm feeling really good about the long term prospects of this.

Operator: So that brings us to the end of the call. I just wanna acknowledge our teams globally for the focus throughout the quarter in delivering such solid results. Thank you all for joining the call today, and we'll talk to you all very soon.

Operator: Thank you. And this does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation. You may now disconnect your lines.

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