Q2 2024 Prologis Inc Earnings Call

Speaker Change: [music].

Operator: Welcome to the Prologis second quarter 2024 earnings conference call. At this time, all participants are in a listen only mode. The question and answer section will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Justin Mang, Senior Vice President, Head of Investor Relations. Thank you. You may begin.

Welcome to the pro largest second quarter 2024 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the call over to Justin Macken Senior Vice President head of Investor Relations. Thank you you may begin.

Justin Mang: Thanks, Daryl. Good morning, everyone.

Justin Macken: Thanks, Darryl and good morning, everyone welcome to our second quarter 2024 earnings conference call the supplemental.

The document is available on our website for a largest dot com under Investor Relations.

Justin Mang: Welcome to our second quarter 2024 earnings conference call. The supplemental document is available on our website at Prologis.com under investor relations. I'd like to state that this conference call will contain forward-looking statements under federal securities law. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors.

Speaker Change: I'd like to state that this conference call will contain forward looking statements under federal Securities laws. These statements are based on current expectations estimates and projections about the market and the industry in which <unk> operates as well as management's beliefs and assumptions.

Speaker Change: Looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.

Justin Mang: For a list of those factors, please refer to the forward-looking statement notice in our 10-K or other SEC filings. Additionally, our second quarter earnings press release and accompanying materials do contain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg D, we have provided a reconciliation to those measures. I'd like to welcome Tim Arndt, our CFO, who will discuss results, real-time market conditions, and guidance. Hamid Moghadam, our Founder and CEO, Dan Letter, our President, and Chris Caton, our Managing Director, are also with us today. With that, I'll hand the call over to Tim.

Speaker Change: A list of those factors. Please refer to the forward looking statement notice in our 10-K or other SEC filings. Additionally.

Speaker Change: Additionally, our second quarter earnings press release, and supplemental do contain financial measures such as <unk> and EBITDA that are non-GAAP and.

And in accordance with Reg G. We have provided a reconciliation to those measures.

Timothy D. Arndt: I'd like to welcome Tim Archer, our CFO, who will cover results real time market conditions and guidance.

Hamid most of them are founder and CEO, Dan letter, our President and Chris Caton, Managing director are also with us today.

Timothy D. Arndt: With that I'll hand, the call over to Tim.

Timothy D. Arndt: Thank you, Justin, and thank you all for joining our call. We had solid execution against our second quarter plan, which showed improvement over the first quarter, underpinned by a pickup in overall market activity. In fact, we leased 52 million square feet in our portfolio, a 27% increase over the first quarter and one of our highest quarters in the past few years. This helped in delivering occupancy, which outperformed our forecast, and more importantly, rent change, well over 70%. This has been achieved in an environment where decision making has remained slow as many customers optimize existing footprints before committing to new space.

Tim: Justin and thank you all for joining our call.

Timothy D. Arndt: We had solid execution against our second quarter plan, which showed improvement over the first quarter underpinned by a pick up in overall market activity.

Speaker Change: We leased 52 million square feet in our portfolio of 27% increase over the first quarter in one of our highest quarters in the past few years. This helped in delivering occupancy, which outperformed our forecast and more importantly at red change well over 70%.

Speaker Change: This was achieved in an environment, where decision making has remained slow as many customers optimize existing footprints before committing to new space.

Timothy D. Arndt: As a result, we expect many property owners to continue to prioritize occupancy and select markets with higher availability, keeping pressure on rent. That said, the bright spot continues to be the depletion of the supply pipeline and successive quarters of very low development starts. We believe we are near peak vacancy, and this dearth of new supply is setting the stage for more favorable conditions in 2025. As evidenced by the very strong rent change this quarter, our lease mark-to-market is serving to sustain meaningful growth through this transition. In terms of results for the quarter, core FFO excluding promotes was $1.36 per share, and including that promote expense was $1.34 per share.

Speaker Change: As a result, we expect many property owners to continue to prioritize occupancy in select markets with higher availability keeping pressure on rents.

Speaker Change: That said the bright spot continues to be the depletion of the supply pipeline in successive quarters of very low development starts. We believe we are near peak vacancy in this dearth of new supply is setting the stage for more favorable conditions in 2025.

As evidenced by very strong rent change this quarter, our lease mark to market is serving to sustain meaningful growth through this transition.

Speaker Change: In terms of results for the quarter core <unk>, excluding promotes was $1 36 per share and including that promote expense was $1 34 per share. We earned promote revenue within our fee per vehicle in Mexico, marking the seventh year of such achievements since its IPO and speaking to the high quality of our portfolio and team in that market.

Timothy D. Arndt: We earned promotion revenue within our FIBRA vehicle in Mexico, marking the seventh year of such achievements since its IPO and speaking to the high quality of our portfolio and team in that market. Global occupancy at our share ended the quarter at 96.5%. Our US portfolio continues to outperform the market by over 320 basis points, a meaningful spread that has widened from our historic norm of roughly 175 basis points. As vacancy normalizes in our markets, we expect this flight to quality to continue.

Speaker Change: <unk>.

Speaker Change: Global occupancy at our share ended the quarter at 96, 5% our U S portfolio continues to outperform the market by over 320 basis points, a meaningful spread that has widened from our historic norm of roughly 175 basis points as vacancy normalizes in our markets. We expect this flight to quality to continue.

Timothy D. Arndt: We crystallized $100 million of our lease mark-to-market during the quarter. As of June, we estimate that the net effective market rents are 42% above in-place rents, representing $2 billion of potential NOI. Over 40% of the decline in our lease mark-to-market ratio is due to this quarter's mark-to-market cap. The net effective rent change was nearly 74% based on commencement and is 64% based on new signing

We crystallize $100 million of our lease mark to market during the quarter as of June we estimate that the net effective market rents are 42% above in place rents representing $2 billion of potential NOI.

Speaker Change: Over 40% of the decline in our lease Mark to market ratio is due to this quarter's mark to market capture.

Speaker Change: Net effective rent change was nearly 74% based on commencement and a 64% based on new signings. This metric can be volatile between quarters due to mix, but we continue to expect full year net effective rent change to be above 70% illustrating the outsize mark to market opportunity that will remain in the near and intermediate term.

Timothy D. Arndt: This metric can be volatile between quarters due to mix, but we continue to expect full-year net effective rent change to be above 70%, illustrating the outsized market-to-market opportunity that will remain in the near and intermediate term. Our same store growth was 7.2% on a cash basis and 5.5% on a net effective basis, both strong despite the impact of over 100 basis points of decline in average occupancy year over year, as well as the effect of fair value lease adjustments on net effective growth from the Duke acquisition.

Speaker Change: Our same store growth was seven 2% on a cash basis five 5% on a net effective basis each strong despite the impact of over 100 basis points of decline in average occupancy year over year as well as the effect of fair value lease adjustments on net effective growth from the Duke acquisition.

Timothy D. Arndt: We deployed over $700 million in new development projects and acquisitions during the quarter and also closed on over $1 billion in dispositions and contributions at values exceeding our initial expectations. We continue to grow our solar energy business, with the installed capacity of our operating portfolio now at 524 megawatts, with an additional 134 megawatts currently under construction, the total of which will generate approximately $55 million of NOI once stabilized in line with our forecast. Finally, we raised $1.2 billion of debt across our balance sheet and funds at a weighted average rate of 4.4% for a term of 11 years.

Speaker Change: We deployed over $700 million into new development projects and acquisitions during the quarter and also closed on over $1 billion in dispositions and contributions at values exceeding our initial expectations.

Speaker Change: We continue to grow our solar energy business with the installed capacity of our operating portfolio now at 524 megawatts with an additional 134 megawatts currently under construction.

Speaker Change: Total, which will generate approximately $55 million of NOI once stabilized in line with our forecast.

Speaker Change: Finally, we raised $1 $2 billion of debt across our balance sheet and funds at a weighted average rate of four 4% and a term of 11 years outside of this total we also launched our $1 billion commercial paper program, which has thus far has saved an average of 60 basis points on our short term borrowing costs in the U S.

Timothy D. Arndt: Outside of this total, we also launched our $1 billion commercial paper program, which has thus far saved an average of 60 basis points on our short-term borrowing costs in the U.S. In terms of our markets, there are several encouraging signs for demand, including port volumes on both the east and west coasts, as well as an increased volume of proposal activity we've seen across our portfolio. While overall leasing has increased since the first quarter, the tone of our conversations with customers warrants continued caution in the near. Even though space utilization sits near a normal range, approximately 85%, we find that many customers simply lack urgency, still prioritizing cost containment in light of an uncertain economic and political environment, both of which will be clearer soon. In the meantime, development starts remain muted and below pre-COVID levels.

Speaker Change: In terms of our markets there are several encouraging signs for demand, including port volumes on both the east and west coasts as well as increased volume of proposal activity, we've seen across our portfolio.

Speaker Change: While overall leasing has increased since the first quarter the tone of our conversations with customers warrants continued caution in the near term.

Speaker Change: Even though space utilization sits at near our normal range of approximately 85%, we find that many customers simply lack urgency still prioritizing cost containment in light of an uncertain economic and political environment, both of which will be clearer soon.

Speaker Change: In the meantime development starts remained muted and below pre COVID-19 levels.

Timothy D. Arndt: Quarterly completions peaked last year at 140 million square feet and are projected to approach 50 million square feet by the fourth quarter of this year. We estimate vacancies in our U.S. and European markets will peak over the next few quarters, likely creating a shift in tone as customers assess their requirements heading into 2025. Until then, rent growth will be anemic in most markets and down modestly in some. Southern California remains its own story, where demand remains sluggish and vacancy continues to drift higher.

Speaker Change: Quarterly completions peaked last year at 140 million square feet and are projected to approach 50 million square feet by the fourth quarter of this year we.

Speaker Change: We estimate vacancies in our U S and European markets will peak over the next few quarters.

Speaker Change: Creating a shift in tone as customers assessed their requirements heading into 2025.

Until then rent growth will be anaemic in most markets and down modestly in some.

Speaker Change: Southern California remains its own story, where demand remains sluggish and vacancy continues to drift higher.

Timothy D. Arndt: While we've observed some green shoots over the last 90 days, we expect soft conditions to persist over the next 12 months. Globally, we estimate that effective market rents declined 2% during the quarter, with 75% of the decline attributed to SoCal.

Speaker Change: While we've observed some green shoots over the last 90 days, we expect soft conditions to persist over the next 12 months.

Speaker Change: Globally, we estimate that effective market rents declined 2% during the quarter with 75% of the decline attributed to Socal.

Timothy D. Arndt: Because there's so much conflicting data available to investors, it's worth mentioning that we measure market rent growth by evaluating effective rents achieved, not asking rents before concessions, a difference that can be as wide as 5 to 10%. We've summarized by highlighting that most of the puts and takes across our global portfolio have provided conditions that are largely stable with reason for intermediate-term optimism due to several quarters of low starts and subdued but positive demand. Turning to capital markets, Values saw modest increases in the second quarter for U.S. and European funds.

Because theres so much conflicting data available to investors, it's worth mentioning that we measure market rent growth by evaluating effective rents achieved not asking rents before concessions a difference that can be as wide as 5% to 10%.

Speaker Change: We've summarized by highlighting up most of the puts and takes across our global portfolio have provided conditions that are largely stable with reason for intermediate term optimism due to several quarters of low starts and subdued but positive demand.

Turning to capital markets.

Speaker Change: Well you saw modest increases in the second quarter for our U S and European funds Theres greater depth amongst buyers of logistics properties and lenders are more active together reducing yield requirements.

Timothy D. Arndt: There is greater depth amongst buyers of logistics properties, and lenders are more active, together reducing yield requirements. In particular, buyer pools for well-located core products are growing, now with multiple bidders back in the mix. We saw this very clearly in a large portfolio sale we closed this quarter, which was originally brought to the market last fall. Interest was reasonable at the time, but we felt pricing was off, elected to wait, and achieved a 28% higher value in the end.

Speaker Change: In particular buyer pools for well located core product are growing now with multiple bidders back in the mix. We saw this very clearly in a large portfolio sale. We closed this quarter, which was originally brought to the market last fall into.

Speaker Change: Interest was reasonable at the time, but we felt pricing was off elected to wait and achieved 28% higher value in the end.

Timothy D. Arndt: I'd like to provide a brief update on our data center business, where we are seeing very good momentum across our pipeline. As you know, access to power is the key to unlocking value, and our dedicated energy and sustainability teams are leveraging our expertise in net zero carbon solutions, solar generation, and battery storage to ensure that we're in the pole position with all of the major utilities. To date, we have secured 1.3 gigawatts of power. Of this, 450 megawatts is currently under construction, and $1.2 billion in TEI. 300 megawatts is in active pre-development with an expected $700 million in TEI, leaving 550 megawatts as available and currently undergoing build-to-suit discussions.

Speaker Change: I'd like to provide a brief update on our data center business, where we are having very good momentum across our pipeline as.

Speaker Change: As you know access to power is the key to unlocking value in our dedicated energy and sustainability teams are leveraging our expertise and net zero carbon solutions solar generation and battery storage to ensure that we're in the pole position with all of the major utilities.

Speaker Change: To date, we have secured one three gigawatts of power.

Speaker Change: Of this 450 megawatts is currently under construction and $1 $2 billion of Ti.

Speaker Change: 300 megawatts is inactive pre development with an expected $700 million of Ti, leaving 550 megawatts is available in currently undergoing build to suit discussions.

Timothy D. Arndt: Beyond all of this, we are also in advanced stages of procurement for an additional one and a half gigawatts, which is key to delivering on our five-year outlook for seven to eight billion dollars of total data center investment. Overall, we've made significant progress growing this business and are optimistic about the targets we laid out at our investor day. Turning to guidance, we are making few changes as the year is playing out to our expectations. As such, we're maintaining our forecast for average occupancy, same store, G&A, development starts, and stabilization. There are only a few small changes otherwise.

Speaker Change: Beyond all this we are also in advanced stages of procurement for an additional one five gigawatts, which is key to delivering on our five year outlook for $7 billion to $8 billion of total data center investment.

Speaker Change: Overall, we've made significant progress growing this business and are optimistic about the targets, we laid out at our Investor day.

Timothy D. Arndt: We are lowering our guidance for strategic capital revenue by $10 million, only to account for the impact of exchange rates, which are hedged elsewhere in our P&L and will not affect overall earnings. Due to the increased activity we're seeing in the capital markets and deals completed year to date, we are increasing our acquisitions guidance to a new range of one to one and a half billion dollars. Similarly, increasing our guidance for overall dispositions and contributions to a range of $2.75 to $3.65 billion.

Speaker Change: Turning to guidance, we are making a few changes as the year is playing out to our expectations as such we're maintaining our forecast for average occupancy same store G&A development starts and stabilization.

Speaker Change: There are only a few small changes otherwise.

We are lowering our guidance for strategic capital revenue by $10 million only to account for the impact of FX rates, which are hedged elsewhere in our P&L and will not affect overall earnings.

Speaker Change: Due to the increased activity, we're seeing in the capital markets and deals completed year to date, we are increasing our acquisitions guidance to a new range of one to one $5 billion and similarly, increasing our guidance for overall dispositions and contributions to a range of $2 $75 billion to $3.65 billion.

Timothy D. Arndt: Ultimately, we are increasing our GAAP earnings to a range of $3.25 to $3.45 per share. Core FFO, excluding net promote expense, will range between $5.46 and $5.54 per share, while Core FFO, including promotes, will range from $5.39 to $5.47 per share, a slight increase at the midpoint from our prior guidance attributed to the FEBR promotion.

Speaker Change: Ultimately, we are increasing our GAAP earnings to a range of $3 25 to $3 45 per share core.

Core <unk>, excluding net promote expense will range between $5 46, and $5 54 per share.

Speaker Change: Core <unk>, including promotes will range from $5 39 to $5 47 per share a slight increase at the midpoint from our prior guidance attributed to the fever promote.

Timothy D. Arndt: Our core earnings guidance calls for nearly 8% growth at the midpoint, which ranks in the 87th percentile of the S&P 500 range. We've been unique in our ability to generate leading growth over a long period of time, not only through a superior business model and portfolio, but also from our commitment to leveraging all that comes from our scale, including adjacent verticals strategic to our core business. Our focus is simply to continue to deliver on this industry-leading and durable growth.

Speaker Change: Our core earnings guidance calls for nearly 8% growth at the midpoint, which ranks in the 87th percentile of the S&P 500 Reits.

Speaker Change: Been unique in our ability to generate leading growth over a long period of time, not only through a superior business model and portfolio, but also from our commitment to leveraging all of it comes from our scale, including adjacent verticals strategic to our core business.

Our focus is simply to continue to deliver on this industry, leading and durable growth.

Timothy D. Arndt: As we close, I'd also like to highlight an upcoming event, our annual Groundbreakers Thought Leadership Forum on October 2nd in London. The program is taking shape as our best yet, exploring the surprising intersection of logistics and health, energy, and even fashion. Additional information about the forum is available on our website, and we hope to see you there or online. With that, I'll hand the call back to the operator for your questions.

Speaker Change: As we close I'd also like to highlight an upcoming event our annual groundbreaker as thought leadership Forum on October 2nd in London. The program is taking shape as our best yet exploring the surprising intersection of logistics and health energy and even fashion additional information for the form is available on our website and we.

Speaker Change: Hope to see you there or online.

Speaker Change: With that I'll hand, the call back to the operator for your questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the line. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from the queue for.

Speaker Change: For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, we ask that you. Please limit yourself to one question one moment. Please while we poll for your questions.

Operator: We ask that you please limit yourself to one question. One moment, please, while we poll for your question. Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Matthew Heck: Thanks. Good morning out there.

Speaker Change: Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Timothy D. Arndt: It looks like your occupancy and rent spreads improved as the quarter progressed. I'm just looking at results versus the NARED update. Can you just talk about whether that momentum has continued into the third quarter and if there are any specific markets that might have driven that improvement? And related to that, on occupancy guidance, the maintained guidance implies some downside during the second half of the year. Can you just talk about what's driving that trajectory, please?

Blaine Matthew Heck: Thanks, Good morning out there it looks like your occupancy and rent spreads improved as the quarter progressed, just looking at results versus the NAREIT update can you just talk about whether that momentum has continued into the third quarter and if there are any specific market that might have driven that improvement and related to that on.

Speaker Change: Occupancy guidance the maintained guidance implies some downside during the second half of the year.

Speaker Change: Can you just talk about what's driving that trajectory. Please.

Timothy D. Arndt: Hey Blaine, it's Tim. I'll start with the first part, and I may ask you to repeat the second. I'm not sure if I understood the question, but coming into the first few weeks of the third quarter, I think, you know, we are maintaining the momentum that I guess you're inferring was picked up between Mayreit and the end of the quarter, which is that proposal activity is strong, and leasing activity is strong.

Hey, Brian It's Tim I'll start with the first part and I might ask you to repeat the second I'm not sure if I understood the question, but coming into.

Brian: The first few weeks of the third quarter I think we are maintaining the momentum.

Brian: That I guess you are inferring was picked up between NAREIT and the end of the quarter, which is that propone.

Brian: Proposal activity is strong leasing activity is strong we see it more in renewals and a little less so in new leasing we're achieving our rents.

Timothy D. Arndt: We see it more in renewals, a little less so in new leasing. We're achieving our rents. Outside of, you know, the drag that we discussed in SoCal just continues to be the market that we watch most. But I think when I put that all together, what we think is we're pleased to see the way the second quarter performed. I think it has executed pretty much precisely as we expected from our discussion 90 days ago, and I feel good about the year.

Brian: Outside of the drag that we discussed.

Brian: Socal just continues to be the market that we watch most but I think when I put that altogether. What we think is we're pleased to see the way the second quarter executed I think it executed pretty much precisely as we expected from our discussion 90 days ago and feel good about the year.

Brian: Okay.

Operator: Thank you, Blaine. Operator, next question.

Blayne operator next question.

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

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

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

Nicholas Gregory Joseph: Thanks, Nick Joseph here with Craig maybe just on the demand side, obviously, it sounds like you're seeing and feeling an improvement there, but I was hoping you could talk about some of the demand differences across different size range adjacent geographies.

Chris Caton: Hi, thanks for the question. It's Chris.

Nicholas Gregory Joseph: Alright, Thanks for the question, it's Chris I'll start with the geographies.

Speaker Change: Healthiest part in.

Speaker Change: In the U S is the southeastern U S.

Chris Caton: I'll start with the geographies. The healthiest part of the U.S. is the southeastern U.S., but I'd also really point out Latin America as well as Europe as being areas that are a boost to the overall global picture. As it relates to size categories, the story remains the same relative to what we discussed on our last earnings call, which is to say sizes above 100, maybe even certainly over 250 and 500. That's where demand momentum is the best, but there's also more availability there. Demand is stable below 100, but that's where vacancies are especially low.

Speaker Change: But it also really pointing out.

Speaker Change: Latin America, as well as Europe as being areas that are a boost the overall global picture.

Speaker Change: As it relates to size categories. The story remains the same relative to what we discussed on our last earnings call, which is to say sizes above 100, maybe even certainly over $2 50, and 500, that's where the demand momentum as the best but Theres also more availability there.

Speaker Change: Then as stable below a 100, but that's where vacancies are especially low.

Speaker Change: Okay.

Operator: Thank you. Operator, next question.

Speaker Change: Operator next question.

Operator: Thank you. Our next question comes from the line of Ron Kamden with Morgan Stanley. Please proceed with your question. Great. Just a quick question on sort of the rent growth conversation.

Operator: Thank you. Our next question comes from the line of Ron Kamden with Morgan Stanley. Please proceed with your question. Great.

Speaker Change: Thank you. Our next question comes from the line of Ron Camden with Morgan Stanley. Please proceed with your question.

Great.

Ronald Kamdem: Just a quick question on sort of the rent growth conversation I think you talked about down two and QQ.

Ronald Kamdem: After being down 1% in Waikiki 24, maybe if you could just provide some commentary of what what the expectations are for the back half of the year and the 4% to 6% sort of rent growth targets long term, how you guys think about that.

Speaker Change: Forward. Thanks.

Timothy D. Arndt: Hey, Ron, thanks for the question. It's Tim.

Hey, Bryan Thanks for the question, it's Tim Yeah.

Speaker Change: And let me start I'll, just reemphasize, we're talking about effective rents here from all the stores and we see out there in quotation method. So this is ultimately taking rents incorporate in all concessions.

Speaker Change: Starting with the next 12 months I'll do it that way as we've described we would we talked about at NAREIT, we basically would divide our portfolio into socal as its own special case, and then everything else and within everything else. There are strong stable and weak markets and I would put all of those other non <unk>.

Timothy D. Arndt: Yeah, and let me start, I'll just reemphasize, we're talking about effective rents here, from all the distortion we see out there in quotation methods. So this is ultimately taking rents incorporated in all concessions. You know, starting with the next 12 months, I'll do it that way, as we've described, we would, we talked about at NARIT, basically would divide our portfolio into SoCal as its own special case, and then everything else.

Speaker Change: Cal markets around flat, maybe modestly negative on market rent growth over the next 12 months, which is a long way of saying, it's really going to be a function of what do we think socal does in the next 12 months.

Speaker Change: We put that altogether inclusive of Socal, we would probably put that in a range of something like two to possibly 5% down in the next 12 months before inflicting.

Timothy D. Arndt: And within everything else, there are strong, stable, and weak markets. And I would put all of those other non-SoCal markets around flat, maybe modestly negative on market rent growth over the next 12 months, which is a long way of saying it's really going to be a function of what we think SoCal does in the next 12 months. When we put that all together, inclusive of SoCal, we would probably put that in a range of something like two to possibly 5% down in the next 12 months before inflation starts to pick up.

Speaker Change: This is a good place to just remind everybody that even in light of that I mean, we.

Speaker Change: We've had three quarters now of some negative market rent growth one down in the fourth quarter of last year went down in the first quarter to down. This this last second quarter.

Timothy D. Arndt: And this is a good place to just remind everybody that even in light of that, I mean, we've had three quarters now of some negative market rent growth, one down in the fourth quarter of last year, one down in the first quarter, and two down this last second quarter. In the meantime, we're putting up very significant rent changes and growth within our NOI, 74%, one of our highest quarters, just this last quarter. So it's very fortuitous that the position we're in, where we have this large lease mark to mark to carry us through this transition period.

In the meantime, we're putting up very significant rent change and growth within our NOI, 74% one of our highest quarters. Just this last quarter. So it's a very fortuitous the position. We're in where you have this large lease mark to Mark just carry us through this transition period.

Operator: Thank you, Ron. Operator, next question.

Thank you Ron Operator next question.

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

Speaker Change: Thank you. Our next question comes from the line of Steve <unk> with Evercore ISI. Please proceed with your question.

Steve Sakwa: Yeah, thanks. Tim, I think you commented on the lease proposals, but I was just wondering if you could provide a little bit more detail. Obviously, that green line is kind of up strongly and to the right, and I'm just curious how much of that is kind of for new activity, for kind of vacant space or development, and how much of that might be for renewal activity, just to kind of frame it out. Because that number is up quite a bit, even from, you know, the past couple years.

Steve: Yes, Thanks, Ken I think you commented on the lease proposals, but I was just wondering if you could provide a little bit more detail, obviously that that green line is kind of up strongly in to the right and I'm. Just curious how much of that is kind of for new activity for kind of vacant space or development and how much of it.

That might be for renewal activity.

Steve: To kind of frame it out because that number is up quite a bit even from kind of the past couple of years.

Timothy D. Arndt: It is. Thanks, Steve. The chart that you're looking at in the supplemental is new leasing, just to be clear. And you highlight something that I'm glad you did.

Steve: It is and I think Steve the chart that you're looking at in the supplemental is new leasing just just to be clear and you highlight something that I'm glad you did we do see the very big uptick in nominal proposals 112 million square feet meaningfully above where we've been.

Timothy D. Arndt: We do see a very big uptick in nominal proposals, 112 million square feet, meaningfully above where we've been. That's a function of a few things. One is just more space to lease. We have some increased vacancy in the portfolio. And this is also a function of just how the next 12 months of roll look. And there's a little bit more there as well. This is why we added, for those who've noticed, a new line just this quarter, which puts that proposal activity in the context of what is available to lease. You see, that measured 42% this last quarter, which we would characterize, and you can see when you look at the chart, as normal.

Speaker Change: That's a function of a few things there one is just more space to lease we have some increased vacancy in the portfolio and this is also a function of just how the next 12 months ago looks and Theres, a little bit more there as well.

Speaker Change: This is why we added for those who have noticed a new line just this quarter, which puts that proposal activity in the context of what is available to lease you see that measured up 42%. This last quarter, which we would characterize and you can see when you look at the chart as normal.

Operator: Thank you, Steve. Operator, next question. Thank you. Our next question comes from the line of Camille Bonnell with the Bank of America. Please proceed with your question. Good morning. The pace of development stabilization seems to be tracking ahead at this rate.

Steve: Thank you Steve Operator next question.

Dan Letter: Yeah, thanks for the question, Camille. This is Dan.

Operator: Thank you. Our next question comes from the line of Camille Bonnell with the Bank of America. Please proceed with your question.

Speaker Change: Thank you. Our next question comes from the line of Combing <unk> with Bank of America. Please proceed with your question.

Speaker Change: Good morning, the pace of development stabilization seem to be tracking ahead at this halfway point of the year. So I was wondering how does this compare to what was budgeted in your guidance and out in the West coast. It looks like you've made some good progress stabilizing some of these development. So can you talk to some general terms on brand stretches on.

Speaker Change: Your writing and how much of that was new leases signed in the quarter.

Speaker Change: Thank you.

Dan Letter: I'll handle the question here. So it was a big stabilization quarter for us. Certainly, development leasing has slowed a bit. I think the best way to look at our development portfolio is to look at the whole book of business; don't necessarily look at it necessarily on a quarter by quarter basis. So if you look at the whole $6 billion development portfolio, all 35 million feet, we're trending to our long-term margin of 24 to 25 percent. So if you look at our 20-year average, it's in the high 20s. So I feel really good about our development portfolio. Thank you.

Steve: Yes. Thanks for the question Camille This is Dan.

Dan: Handle the question here so.

Dan: It was a big stabilization quarter for us.

Dan: Certainly development leasing has slowed a bit.

Dan: I think the best way to look at our development.

Dan: Our portfolio is look at the whole book of business don't look at it necessarily on a quarter by quarter basis. So if you look at that the whole 6 billion dollar development portfolio, all 35 million feet.

Dan: We're trending to our long term margin of 24% to 25%. So if you look at our 20 year average it's in the high <unk>, So feel really good about.

Dan: Our development portfolio.

Dan: Okay.

Operator: Thank you, Camille. Operator, next question.

Speaker Change: Thank you Camille operator next question.

Speaker Change: Okay.

Operator: Thank you. Our next question comes from the line of John Peterson with Jeffries. Please proceed with your question. Great.

Speaker Change: Yes.

Thank you. Our next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question.

John Peterson: Great. Thank you.

Dan Letter: So I was looking at your top tenant list. It looks like an increase in square feet leased to Amazon and Home Depot. We're hearing from other people that Amazon is more active this year. Whether you want to talk about them specifically, or maybe we can frame it in the context of what impact do some of these larger players in the market being more active in leasing have on the overall market? Are people waiting for them to make decisions before we start to see an uptick in activity? Is that kind of what's happening right now?

Jonathan Michael Petersen: Great. Thank you. So I was looking at your top tenant list it looks like an increase in square feet leased to Amazon and home depot.

Speaker Change: Hearing from other people that Amazon is more active this year, what do you want to talk about them, specifically or maybe we can frame it in in.

Speaker Change: In the context of what.

Speaker Change: Packed with some of the larger players in the market being more active in leasing have on the overall market like are people waiting for them to make decisions before we start to see an uptick in activity is that kind of what's happening right now.

Dan Letter: Yeah, John. Hi, this is Dan.

Speaker Change: Yes, John Hi, This is Dan Thanks for the question, so what youre pointing to is.

Speaker Change: Our top 25 list, where you saw some big completions come into the operating portfolio.

Speaker Change: These were decisions that were made a year ago.

Speaker Change: And.

Speaker Change: Sure we've had some success with Amazon this year I would actually talk about the ecommerce segment overall.

Speaker Change: E Commerce has been very strong we talked about this happening multiple quarters ago before it was a story and it's played out as exactly as we expected.

Dan Letter: Thanks for the question. So what you're pointing to is our top 25 list where you saw some big completions come into the operating portfolio. Those were decisions that were made a year ago.

Dan Letter: And sure, we've had some success with Amazon this year. But I would actually talk about the e-commerce segment overall. E-commerce has been very strong. We talked about this happening multiple quarters ago before it was a story, and it's played out exactly as we expected.

Speaker Change: Commerce continues to be strong.

Speaker Change: Amazon was a little quiet.

Speaker Change: For us this last quarter, but at any given time there are top customer we've got a lot going on with them and it's.

Operator: E-commerce continues to be strong. Amazon was a little quiet for us this last quarter, but at any given time, they're a top customer. We've got a lot going on with them, and it's a very strong segment for us.

Speaker Change: It's a very strong segment for us.

John: Thank you John Operator next question.

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

Operator: Thank you, John. Operator, next question. Thank you. Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question. Hi everyone, maybe just on the transaction market. I think Tim

Speaker Change: Thank you. Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows: Hi, everyone, maybe just on the transaction market I think Tim earlier, you mentioned, how the depth of buyers is deeper than the disposition. You did was it a materially higher valuation now versus 2023. So I guess what are you guys seeing from my acquisition potential on your side, who is selling and kind of your opportunity there in the near term.

Timothy D. Arndt: Hi Caitlin, thanks for the question. Yes, we have seen the transaction market open up. I would say normal.

Caitlin Burrows: Hi, Caitlin and thanks for the question.

Speaker Change: Yes, we have seen the transaction market open up I'd say normalize we're hearing from the brokerage community that theyre doing a lot of broker opinion of us. So we expect to see the transaction markets continue we've had a lot of success in the disposition, we've outperformed across the board and our.

Timothy D. Arndt: We're hearing from the brokerage community that they're doing a lot of broker opinion of values, so we expect to see the transaction market continue. We've had a lot of success in the disposition. We've outperformed across the board in our disposition business, which is why you saw us move our guidance up. We definitely want to take advantage of the market as it's opened up, and we have also been exploring all sorts of interesting opportunities and many markets around the globe, and we're really excited about our acquisition.

Speaker Change: Disposition business, which is why you saw us move our guidance up we just want to take advantage of the market is opened up and we have also been turning over all sorts of interesting opportunities in many markets around the globe really excited about our acquisition.

Volume for the year.

Timothy D. Arndt: Yeah, the other thing I would add to that, Caitlin, is that you have closed-end funds that are coming to the end of their lives, and those portfolios need to be liquidated. And the investors, generally, because of what's going on in their portfolios, not just in real estate but also in other private asset classes, need liquidity because they have outstanding commitments. So there's pressure on those guys to realize these sales. And industrial real estate has been one of the places where their performance has been really great, and crystallization of those values is important. So it's the natural course of things, and you have some deferred sales volume that was put on suspended animation for the last 24 months that's now coming through.

Speaker Change: Yes.

Speaker Change: Other thing I would add to that Caitlin is that you have closed end funds that are coming to the end of their lives and dusk portfolio needs to be liquidated.

Speaker Change: And the investments generally because of what's going on in their portfolio.

Speaker Change: In real estate, but also in other private asset classes need liquidity, because they have outstanding commitment. So there's pressure from those guys to realize these sales and industrial real estate has been one of the places that their performance has been really great and crystallization of those values is important so.

Speaker Change: It's a natural course of things and you have some deferred sales volume that was put on suspended animation for the last 24 months.

Timothy D. Arndt: But generally, I would say the transaction market is very good right now with multiple offers for Good Portfolios. And the sweet spot is a couple hundred million dollars, I would say. Not mega deals and not tiny deals, but sort of in the $100, $200 million range.

Speaker Change: Now coming through but generally I would say that transaction market is very tight right now with multiple offers for good portfolios and the sweet spot.

Speaker Change: A couple of $100 million I would say not mega deals and timing of deals, but sort of in the 100 $200 million.

Operator: Thank you, Caitlin. Operator, next question. Thank you. Our next question comes from the line of Nick Thillman with Baird. Please proceed with your question. Hey, good morning out there. Tim, you kind of mentioned the uptick in new business.

Speaker Change: Thank you Caitlin operator next question.

Timothy D. Arndt: Sure, Nick. Thanks. On the retention front, you know, we typically forecast between 70% and 80%. So think of it as 75%. And that's a good number.

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

Caitlin Burrows: Thank you. Our next question comes from the line of Nick Tillman with Baird. Please proceed with your question.

Nicholas Patrick Thillman: Hey, good morning out there Tim you kind of mentioned the uptick in new lease proposals, maybe just wanted to dig in on on retention for the next 12 months are you expecting that to be a historical averages and then also continue to see kind of free rent uptick it as elevated concessions is that kind of spurred demand a little bit just want a little more color on that thanks.

Timothy D. Arndt: And I would characterize that as our expectations over the coming several quarters. And then free rent, I think we may have discussed this recently, I would view free rent as, you know, just reverting to mean levels. We had kind of, there's another area where we had some surge pricing, if you will, some much lower free rent over the last few years. And now the market is normalizing at a different pace in different places. It's coming back to a more normalized level as well.

Nicholas Patrick Thillman: So Nick thanks.

Speaker Change: On the retention front, we typically forecast between 70 and 80%.

Speaker Change: Think of it as 75 and Thats, a good number and I would I would characterize that as our expectations over the coming coming several quarters and then free rent, but I think we may have discussed. This recently I would view free rent is.

Just reverting to mean levels, we had kind of is another area, where we had some surge pricing. If you will some much lower free rent over the last few years.

Speaker Change: And now the market is as it normalizes at different pace in different places its coming back to a more normalized level as well.

Operator: Thank you, Nick. Operator, next question.

Speaker Change: Thank you operator next question.

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

Speaker Change: Our next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.

Vikram L. Malhotra: Good morning. Thanks so much for taking the question. So I guess just two parts. One, Chris, could you just update us on the, you know, I think $175 million of net absorption, sort of what you anticipate for the second half.

Vikram L. Malhotra: Hi, good morning. Thanks, So much thing the question. So I guess just two parts one.

Vikram L. Malhotra: Chris could you just update us sort of your view on <unk>.

Chris: 175 million of net absorption sort of what you anticipate.

Chris: For the second half and then I guess, you also mentioned sort of the role in rent growth.

Projection could you.

Speaker Change: Expand upon that in context of your three year view that you provided at the Investor day on occupancy and same store NOI growth. Thanks.

Chris Caton: Hi Vikram. Thanks for the question. It's Chris.

Speaker Change: Hi, Vikram. Thanks for the question Chris.

Speaker Change: So as it relates to demand just for those following along net absorption in the first quarter was $26 7 million square feet. We are at <unk> 43 in the second and so we expect 40 to 50 million square feet of net absorption I think that's the tone that Tim had in his script and that we have here on the call for you.

Speaker Change: That will leave us with a full year net absorption of 160 to 170 million square feet.

Chris Caton: So as it relates to demand, just for those following along, net absorption in the first quarter was 26, 27 million square feet; we have it at 43 in the second. And so we expect 40 to 50 million square feet of net absorption. I think that's the tone that Tim had in his script and that we have here on the call for you. That'll leave us with a full year net absorption of 160 to 170 million square feet. Tim's going to take the rent.

Speaker Change: Tim is going to take the right vikram.

Timothy D. Arndt: Yeah, Vikram, in terms of the three years, you know, the way we think about that, we clearly have an environment now where the window of time that we think about the three years in has shifted. We've highlighted that we think rents are going to continue to fall modestly in the coming 12 months and grow thereafter. But the time that is then left to measure up to the end of 2026 has, of course, been shortened.

Vikram L. Malhotra: Vikram I in terms of the three years the way, we think about that we clearly have an environment now where the window of time that we think about the.

Three years and has shifted.

Tim: We've highlighted that we think rents are going to continue to fall.

Tim: Modestly in the coming 12 months.

Speaker Change: Grow thereafter, but the time that has been left to measure up to the end of 2026 has of course been shortened if we look at that same period. The end of 'twenty three to the end of 2026. Our sense is that rents are going to be flat then to modestly positive over that entire period, but we would couch that ed.

Timothy D. Arndt: If we look at that same period, the end of 23 to the end of 2026, our sense is that rents are going to be flat then modestly positive over that entire period. But we would couch that as rent that's really been deferred, that the window is moving and not ultimately lost.

Speaker Change: Rent, that's really been deferred that the windows moving and ultimately loss.

Timothy D. Arndt: Yeah, one other perspective I might provide to you is that the big change since our four to six percent three-year forecast has actually been in concessions. So those concessions have – I mean, in other words, if you had two forecasts, one for asking rents and one for effective rents, the effective rent one has been affected more since our investor day when we laid out that assumption. Not all of it.

Speaker Change: Yes, one other perspective I might provide to you is that the big change since our Florida, 6% three year forecast has actually been in concessions. So those concessions have in other words, if you had to.

Speaker Change: To forecast one for asking rents and one core effective rents the effective rent one has been affected more.

Speaker Change: Since our Investor day, when we laid out that assumption not all of it the face rents have come down in southern California, certainly, but most of it has been expansion in the concessions and we see those burning off over the next 12 months.

Timothy D. Arndt: The face rents have come down in Southern California, certainly, but most of it has been an expansion in the concessions, and we see those burning off over the next 12 months as markets come into – even the weekend markets come into balance. Just to give you a sense of something that Chris mentioned before, Southern California accounts for about 23 percent of our rents over the next 12 months. What we categorize as sort of a weakish market is another 21 percent of our rental profile for the next 12 months, and fully 56 percent of the rents rolling over in the next 12 months are in stable or healthy markets.

Speaker Change: As markets.

Speaker Change: Come into even the weekend markets come into balance just to give you a sense of something that.

Speaker Change: Chris mentioned before a southern California accounts for about 23% of our rents over the next 12 months.

Chris: What we categorize as sort of the weakish market or another 21% of our profile.

Chris: Our rental profile for the next 12 months and fully 56% of the rents rolling over in the next 12 months are in stable or healthy markets. So.

Timothy D. Arndt: So this is really a Southern California problem where there is both an expansion in concessions and a reduction in face rent. Fortunately – and this is really important – Southern California is the market with the largest mark to market in the next 12 months. Even with the declines that we're projecting, so there is pretty good downside protection. In fact, upside protection, if there's such a word, on those expiring rents in Southern California. So ironically, the weakest markets have the most mark-to-market, certainly in New York.

Speaker Change: This isn't really a southern California problem, where it's both an expansion in concessions and a reduction in base rent Fortunately and this is really important.

Speaker Change: Southern California is the market with the largest mark to market in the next 12 months.

Speaker Change: Even with the decline that we're projecting so there is pretty good downside protection in fact upside protection, if there's such a word.

Speaker Change: On those expiring rents in southern California. So.

Speaker Change: Ironically, the weakest markets have the most mark to market.

Speaker Change: Certainly in the near term.

Operator: Thank you, Vikram. Operator, next question.

Vikram L. Malhotra: Thank you Vikram operator next question.

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

Speaker Change: Thank you. Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.

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

John P. Kim: Thank you I wanted to ask about the occupancy trajectory for remainder of this year at NAREIT. There was some discussion of that it would dip below 96% in the near term and then recover is that still on the table or are you now pass that risk given you ended the quarter at $96 four.

Dan Letter: Thanks, John, and I realize this was also Blaine's question that I missed earlier, so thanks for coming back to it. You know, the 96 comment was very specific about where we thought the second quarter was going to land. I would say that the year to date average that we have so far is around 96.6 year to date. The midpoint of our guidance is 96 and a quarter. That just reflects some tougher roles and so a little bit longer lease up time that we see in new leasing. I hope it's conservative. I suppose there's that possibility, but we feel good about the range that we've established.

Speaker Change: Thanks, John and I realize this was also a <unk> question that I missed earlier, so thanks for coming back to it.

Speaker Change: The 96 comment was very specific about where we thought the second quarter was going to land.

I would say that the year to date average that we have so far we're around $96 six year to date the midpoint of our guidance is <unk> 96 in the quarter that just reflects some tougher role and so so a little bit longer lease up time that we see in new leasing.

Speaker Change: I hope, it's conservative I suppose there is a possibility, but we feel good about the range that we've established.

Dan Letter: You know, one other way of, and I think this was in Tim's prepared remarks, I think the quality of the portfolio manifests itself in two ways. It manifests itself in terms of a premium in occupancy, which, if anything, has expanded in this market environment because, you know, when markets are really tight, people don't have a choice. They can't be picky about the quality of space, and that's pretty much everything they lease. But as markets get more normalized, softer in some cases, you know, business goes towards higher quality businesses.

Speaker Change: One other way up and I think this where this was in Tim's prepared remarks, I think the quality of the portfolio manifests itself in two ways. It manifests itself in terms of premium in occupancy, which if anything has expanded in this market environment because.

Tim: When when markets are really tight people don't have a choice they can't be picky about the quality space pretty much everything leases, but as markets get more normalized softer in some cases.

Speaker Change: <unk> goes towards the higher quality.

Speaker Change: Business aside it's hard to predict the absolute level of occupancy certainly quarter by quarter, because one or two leases even as large as our portfolio has can really move around the numbers, but I can tell you our premium I'm very confident of our premium and occupancy.

Dan Letter: So it's hard to predict the absolute level of occupancy, certainly quarter by quarter, because one or two leases, even as large as our portfolio is, can really move the numbers around. But I can tell you our premium. I'm very confident of our premium in occupancy compared to the rest of the market, and I think it's going to expand even further.

Speaker Change: Compared to the rest of the market I think it's going to expand even further.

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

John: Thank you John Operator next question.

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

Speaker Change: Thank you. Our next question comes from the line of Vince <unk> with Green Street. Please proceed with your question.

Vince James Tibone: Cap Allocation Guidance and Applying in Excel

Vince James Tibone: Hi, good morning.

Vince James Tibone: Capital allocation guidance and implies an acceleration of starts in the back half of the year are these all mostly plan logistics starts or are there some data centers in there as well and related to all that kind of what markets would you be comfortable starting a spec project today in the current environment.

Dan Letter: Vince, hi, it's Dan. Thanks for the question. So, first of all, your question around what's in our start volume, that is entirely logistics that you see there. And the better way to think about where we're going to build is to look at the sheer amount of opportunities we have. We have $40 billion worth of opportunities in dozens of markets around the world. We've raised the bar on spec.

Speaker Change: Vince Hi, it's Dan Thanks for the question.

Dan: I think well first of all your question around what's in our start volume that is entirely logistics that you see there.

And the better way to think about where we're going to build is look at the sheer amount of opportunities. We have we have $40 billion worth of opportunities and dozens of markets around the world. We've raised the bar on spec, we take it through a rigorous process.

Dan: Tension to the market fundamentals and look at every deal on a deal by deal basis. So we have many markets around the world that will be building in this year.

Dan Letter: We take it through a rigorous process, pay attention to the market fundamentals, and look at every deal on a deal-by-deal basis. So we have many markets around the world that we'll be building in this year. And I think decisions that we make on a deal-by-deal basis may change between now and when we start, so it's hard to peg anything certainly right now.

Dan: I think decisions that we make on a deal by deal basis.

Speaker Change: Any change between now and when we start.

Speaker Change: It's hard to peg anything certainly right now.

Operator: But if you're asking for specific names of markets, I would say Mexico is super strong, Nashville, Houston, the Southeast, pretty strong in demand there, and Northern Europe is very strong. So those are the places you're most likely to see speculative development starts.

Speaker Change: But if youre asking for specific names of markets I would say Mexico is super strong.

Speaker Change: Nashville Houston.

Speaker Change: Southeast.

Speaker Change: Pretty strong in.

Speaker Change: And demand their northern Europe is very strong. So those are the places you're most likely to see spec development starts.

Operator: Thank you, Vince. Operator, next question. Thank you. Our next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question. Thanks. Good morning. I want to talk about your data center business.

Speaker Change: Thank you Vince operator next question.

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

Speaker Change: Thank you. Our next question comes from the line of Keybanc Kim with <unk> Securities. Please proceed with your question.

Kim: Thanks, Good morning, I wanted to talk about your data center business given the update you provided a listen I'll start looking in it seems like you're at here.

Kim: Ahead of your five year plan for three Gigawatts of deployment I am not sure. If that's correct, but maybe you can just comment on incremental changes in demand youre seeing in that business.

Unknown Executive: We are more optimistic about our data center business since the time of our investor day. I think where some of those numbers come from, even.

Speaker Change: We are more optimistic about our data center business since that time of our Investor Day, I think where some of those numbers come from Keybanc.

Speaker Change: One of it is we've done some exxon recruiting in terms of that.

Our specialists in this sector that have joined the team and are very excited and secondly, the <unk>.

Unknown Executive: Part of it is that we've done some excellent recruiting in terms of specialists in the sector that have joined the team and are very excited. And secondly, the energy team that we have, the renewable energy team that we have, has excellent relationships with utilities. And that's something that is oftentimes missing in a lot of data center companies that just have the real estate component. And obviously, we know the five hyperscalers really well.

Speaker Change: Energy team that we have the renewable energy team that we have has excellent relationships with utilities and Thats something that oftentimes is missing in a lot of data center companies that are just got the real estate component and obviously, we know that.

Unknown Executive: And in this environment, the ability to finance, deliver, and execute becomes super important. These are mission-critical deployments for these companies, and it is increasingly difficult for private players that don't have a balance sheet to compete in that market. So we think the competitive position of Prologis, both because of talent and balance sheet, is just going to get better and better going forward.

Speaker Change: Five our hyperscale.

Speaker Change: Really well and in this environment, the ability to finance and deliver and execute becomes Super important. These are mission critical.

Speaker Change: Deployments for these companies.

Speaker Change: And it's increasingly difficult for private players that don't have a balance sheet to.

Speaker Change: To compete in that market. So we think the competitive position for our largest both because of talent and balance sheets are just trying to get better and better going forward.

Operator: Thank you, Keevan. Operator, next question. Our next question comes from the line of Mike Mueller with J.P. Morgan.

Speaker Change: Thank you Kevin Operator next question.

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

Speaker Change: Our next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question.

Michael William Mueller: Yeah, Hi.

Michael William Mueller: Or do you think we are in terms of three pls resetting their footprints.

Unknown Executive: Hi Mike. Thanks for the question. So the 3PL market is really an interesting dynamic right now. What we're seeing is certainly slack in the system, more acute in Southern California where there's simply just more 3PLs, almost double the average across the U.S., and that's where they took up a lot more space during COVID. Now, you can't deliver for a customer in a market where you don't have space, and a lot of the excess space that 3PLs have is scattered throughout their network.

Michael William Mueller: Hi, Mike.

Speaker Change: For the question. So the <unk> market is really an interesting dynamic right now.

Speaker Change: What we're seeing is certainly slack in the system.

Speaker Change: More acute in southern California, whether it's simply just more three pls almost double the average across the U S and Thats, where they took up a lot more space during COVID-19.

Speaker Change: Now you can't deliver for a customer in a market.

Speaker Change: You don't have space and a lot of the excess space that <unk> have is scattered throughout their networks.

Unknown Executive: By way of example, one of our top 25 customers came to us recently and said, we have six to seven percent excess space in our network, yet a 750,000 square foot need emerged in a major market, which led to a long-term, very large lease for us.

Speaker Change: By way of example, one of our top 25 customers came to US recently and said, we have 6% to 7% excess space in our network yet a 750000 square foot need emerged in a major market, which led to a long term very large lease for us.

Unknown Executive: Yeah, one way to think about the 3PL market is this. The 3PLs basically serve two purposes. Some 3PL business and volume comes from players that just want to outsource that activity to somebody else because they want to focus on their own business. And what I consider that to be baseload business, it doesn't act any differently than leases that are directly entered into by those companies, those principals.

Speaker Change: Yes, one way to think about the <unk> market is this the <unk> basically serve two purposes.

Speaker Change: Some CPL business and volume comes from.

Speaker Change: Players that just want to outsource that activity to somebody else because they wanted to focus on their own business and what I consider that to be Baseload business. It doesn't act any differently than leases that are directly.

Speaker Change: Third into by those companies. Those principles then there is sort of the surge component of <unk> PFS that that is the.

Unknown Executive: Then there is sort of the surge component of 3PLs. That is the component that is likely to be more volatile. On the way down, when markets are becoming softer, you expect that component to actually suffer more. And when the markets are in an upswing, that's where you see the excess activity. The base part stays pretty consistent with the rest of the portfolio. Southern California, to be specific, is in the low 30% range in terms of its 3PL share of the business.

Speaker Change: Bonus that is likely to be more volatile on the way down when markets are becoming <unk>.

Speaker Change: Softer you expect that that component to actually suffer more and when the markets are on the upswing, that's where you see the excess activity the base part stays pretty consistent with the rest of the portfolio Southern California to be specific it has in the low 30% range.

Speaker Change: Yeah.

In terms of <unk> share of the business now a lot of that its baseload business, but some of it is search business.

Unknown Executive: Now, a lot of that is baseload business, but some of it is surge business. Compared to the average in the U.S., which is about 18% of the total portfolio, is leased by 3PLs. So obviously, those markets with bigger exposure to 3PLs have more of this problem with the surge component.

Speaker Change: Versus the average of the U S, which is about 18% of the total portfolio at least by three PL. So obviously those markets with bigger exposure to <unk> have more of this problem on the search component.

Speaker Change: Yes.

Operator: Thank you, Mike. Operator, next question. Thank you. Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question. Good afternoon. Thanks a lot for taking my question.

Speaker Change: Thank you Mike Operator next question.

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

Speaker Change: Thank you. Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Michael Goldsmith: Good afternoon. Thanks, a lot for taking my question you continue to remain confident on the intermediate term outlook, particularly on the demand side. So maybe just to sum everything up there that we've heard already today what evidence do you see today that gets you excited and then can you kind of walk us through how you see the timing of the recovery playing.

Speaker Change: Thanks.

Hamid R. Moghadam: Look, predicting market cycles, particularly when you've got a couple of wars going on, you've got a Fed that's at an inflection point with respect to interest rates, and you've got a presidential election coming up, which is, you know, obviously with the events of this weekend that are highly volatile, you've got three major things going on. And you know, to the extent that you're asking us for very specific forecasts, let me tell you, we're not that good, and you should know that. But what gives us confidence?

Speaker Change: Look predicting market cycles, particularly when you've got a couple of wars going on you've got a fat that's at an inflection point with respect to interest rates.

Speaker Change: And you've got a presidential election, coming up which is.

Speaker Change: Obviously with the events of this weekend than ours that are highly volatile you got three major things going on and to the extent that you are asking us for very specific forecast. Let me tell you were not were not that good and.

You should you should know that but what gives us confidence we can argue whether the full recovery of the market is six months or 12 months or 18 months I frankly think.

Hamid R. Moghadam: We can argue whether the full recovery of the market is six months or 12 months or 18 months. But I frankly think that this is just my sense, having done this for 40 years, that the Southern California markets that are the softest are going to stabilize the latest in about 12 months out, and the other soft markets are a matter of between now and 12 months. And more than half the markets are actually, they don't need to recover because they've never not recovered. They've been going straight up.

Speaker Change: This is just just my sense, having done this for 40 years that the southern California market centered the softest aren't going to stabilize the latest in about 12 months out and the other stock markets are matter of between now and 12 months and more than half the markets are actually they don't need to recover because they haven't.

Speaker Change: Never unrecovered, they've been going straight up so so I think you were talking about the next 12 months as various markets sort of turned the corner.

Hamid R. Moghadam: So I think you were talking about the next 12 months as various markets sort of turn the corner. If I were to pick a number, and I think if you kind of get your head into January of next year, the presidential uncertainty will be gone. I'm pretty sure that the Fed uncertainty will be gone, so we'll be down to the political starts. And what we know for a fact, which is not a prediction, is that start volume is very low, and replacement costs have continued to go up.

Speaker Change: If I were going to pick a number and I think if you kind of get your head into January of next year. The presidential uncertainty will be done I am pretty should assure that fed uncertainty will be done. So it will be down to the political starts and what we know for a fact.

Speaker Change: Which is not a prediction is that start volume is very low.

Speaker Change #100: And replacement costs have continued to go up construction costs have moderated, but exactions on land and approvals and entitlements. Those continue to go up so I'm Super confident about the long term nature.

Hamid R. Moghadam: Construction costs have moderated, but the exactions on land and approvals and entitlements, those continue to go up. So I'm super confident about the long-term strength of our business, and calling it over quarters or even a couple of quarters is really difficult, but if you want an answer, you have it.

Speaker Change: Strength of our business.

Speaker Change: Im calling it over quarters or even couple of quarters.

Speaker Change #101: It's really difficult, but if you want an answer you'll have it.

Speaker Change: Okay.

Operator: Thank you, Michael. Operator, next question.

Speaker Change: Thank you Michael Operator next question.

Operator: Thank you. Our next question comes from the line of Todd Thomas with KeyBank Capital Markets. Please proceed with your question.

Speaker Change: Thank you. Our next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.

Okay.

Todd Michael Thomas: Hi Hamid, just following up on that a little bit, I'd be curious to get your thoughts on another maybe uncertain item, the potential impact tariffs might have on trade and industrial real estate in the US and just, you know, whether conversations you're having today with tenants or prospective tenants might be impacted as a result. And really, does that change anything? Potentially how you think about allocating capital globally?

Todd Michael Thomas: Hi, Thanks.

Just following up on that a little bit I'd be curious to get your thoughts on now.

Todd Michael Thomas: Another may be uncertain item and the potential impact tariffs might have on on trade and industrial real estate in the U S and just whether conversations you're having today with tenants are prospective tenants might be impacted as a result, and really does that change anything potentially.

Todd Michael Thomas: Potentially how you think about allocating capital globally.

Hamid R. Moghadam: Yeah, that's a really good question. First of all, I think there is a race between both parties on tariffs. So I'm not sure which outcome is going to lead to more tariffs. Probably, the Trump outcome, which is a higher probability at this point, is going to lead to more tariffs, specifically on China. But at the end of the day, I think what you need to remember is that we are supporting the consumption side of the supply chain. We've never focused on the production end of the supply chain.

Speaker Change: Yes, that's a really good question.

Speaker Change #102: So first of all I think there is a race between both parties on tariffs I'm not sure, which outcome is going to lead to more tariffs probably that Trump outcome, which is a higher probability at this point is going to lead to more terrorists, specifically on China, but at the end of the day I think what you need to remember is that we are in supporting the.

Speaker Change: <unk> cited supply chain, we've never focused on that.

Speaker Change: <unk> and that the supply chain so the same.

Hamid R. Moghadam: So the same amount of goods, the volume of goods needs to get consumed in these markets. With respect to specific tariffs on China, all that business as part of China plus one strategy of a lot of suppliers has already moved to other markets. Most of them are in Asia. A lot of them are in Southeast Asia. Some of it has shifted over to Mexico, particularly on the northern border.

Speaker Change: Amount of goods volume of goods needs to get confused consumed in these markets with respect to specific tariffs on China on that business as part of China, plus one strategy of a lot of suppliers has already moved to.

Speaker Change: Two other markets most of them are in Asia, and a lot of them are in southeast Asia. Some of it has shifted over to Mecca.

Hamid R. Moghadam: But at the end of the day, they're going to get consumed where people are in the U.S., so we don't see a radical demand shift between markets or in terms of overall need for our kind of product. So that's the main driver. The second order effect is, to the extent there are tariffs, Economics 101, you're going to have higher inflation, and that could cause the Fed to relax, and that will obviously have a headwind effect on the overall economy, which in turn will affect demand for industrial real estate and everything else.

Speaker Change: Mexico, particularly on the northern border.

So but at the end of the day, they're going to get consumed where the people are in the U S. So we don't see a radical demand shift between markets are in terms of overall need for our kind of product.

Speaker Change: So that's the main driver the second order effect is to the extent there are terrorists.

Speaker Change: Economics, 101, you're going to have higher inflation and that good.

Speaker Change: Cause the fed to relax slower.

Speaker Change: And and that will have obviously, a headwind effect on the overall economy, which in turn.

Speaker Change: Which in turn will affect.

Speaker Change: Demand for industrial real estate and everything else. So I am not worried at all about the primary effect the direct effect of China. The way people think about this China linked connection and the fact that that somehow going to be under pressure because the containers.

Speaker Change: Are you going to Landon L. A they don't really we don't really care, where they come from but the second order effect, which most people don't think about it I think it's kind of important.

Hamid R. Moghadam: We don't really care where they come from. But the second-order effect, which most people don't think about, I think it's kind of important. But that will be a problem in everybody's earnings calls if it were to materialize.

But.

Speaker Change: That will be a problem and everybody's earnings calls if it were to materialize.

Speaker Change: Okay.

Operator: Thank you, Todd. Operator, next question. Thank you. Our last question will come from the line of Nicholas Yulico with Scotia Bank. Please proceed with your question. Oh, yeah. Hey, thanks. You talked earlier about the transaction market price.

Todd Michael Thomas: Thank you Todd Operator next question.

Operator: Thank you. Our last question will come from the line of Nicholas Yulico with Scotiabank. Please proceed with your question.

Speaker Change #103: Thank you our last question will come from the line of Nicholas <unk> with Scotiabank. Please proceed with your question.

Nicholas: Oh, Yeah, hey, thanks.

Nicholas: Earlier about the transaction market pricing improving can you relate that to the strategic capital.

Nicholas Gregory Joseph: Revenue, how should we think about kind of where the funds are valued right now whether there could be upside potential revenue for that.

Speaker Change #105: Versus on the funds flow side, you know what you're seeing.

Nicholas Gregory Joseph: Okay.

Unknown Executive: On our fund valuation, I can confidently tell you that we have turned the corner in both the U.S. and Europe. We were early in adjusting our values, and I think we're now on the good side of the cycle. I think in a lot of other people's funds, they've been dragging their feet in adjusting the real values part of it. Parts of it, you know, some of it intentionally and some of it not intentionally, because the appraisers are always backward-looking, and until there's data, and it takes time for data to reflect itself in the comp set, those values haven't adjusted.

Speaker Change #106: On the on our final valuation I can confidently tell you that we have turned the corner in both the us and Europe, we were early adjusting our values.

Speaker Change #106: And I think we're now in the good side of the cycle I think in a lot of other people's funds that have been dragging their feet in adjusting their real value is part of it part.

Speaker Change #106: Some of it intentionally in some of it not intentionally because of the appraisers are always backward looking and until there is data and it takes time for data to reflect itself in the comp set those values have been adjusted so I think that market will continue to experience a decline in values that really occurred six 912 months ago.

Unknown Executive: So I think the market will continue to experience the decline in values that really occurred 6, 9, 12 months ago but are just now being acknowledged. I think we've already passed that, and our funds will be going up in value because of a more direct link between our valuation process, which is, by the way, independent. That's really important to also understand.

But are just not being acknowledged I think we've already passed that and our funds will will be going up in values.

Speaker Change #106: Does have a more direct link between our valuation process, which is by the way independent and that's really important to also understand a lot of these funds don't do independent appraisals.

Unknown Executive: A lot of these funds don't do independent appraisals, and others. So you may hear mixed messages on that, and that's just because we've been ahead of the curve. As to the second part of your question, which is fund flows into industrial real estate, there is a tremendous amount of money that has been raised and not spent on acquisitions and by investment managers, and my experience tells me that that money is going to get spent.

Speaker Change #106: So you may hear a mixed messages on that and that's just because we've been ahead of the curve.

Speaker Change #106: As to the second part of your question, which is fund flows into industrial real estate. There is a tremendous amount of money that has been raised and not spend.

Speaker Change #107: In acquisitions and by by investment managers and my experience tells me that that money is going to get smacked.

Unknown Executive: And so I think that's going to be the source of capital for a lot of transactions going forward. In terms of new allocations to industrial real estate and everything else, remember, these portfolios are under a lot of pressure because they've had office buildings that have declined in value by 30, 40, 50, 60%, which has been the biggest component of their portfolios. So they're under pressure, and they're looking for more liquidity as opposed to being in a front foot forward investing mode. So I think the volume of new capital allocations to all kinds of real estate will be slow to come back, but it is on the upswing. It's just slower coming back than most other cycles.

Speaker Change #107: And so I think that's going to be the source of capital for a lot of transactions going forward in terms of new allocations to industrial real estate and everything else remember these portfolios are under a lot of pressure because they've had.

Speaker Change #107: Office buildings that have declined in value 30, 40, 50, 60%, which has been the biggest component of their portfolios. So they are under pressure and theyre looking for more liquidity as opposed to being in a front foot forward investing mode. So I think the volume of new capital allocations to all kinds of real estate.

Speaker Change #107: Well, we'll be saw coming back but it is on the upswing is just slower coming back than most other cycles.

Charles: Charles. All right. So I think that was the last question.

Hamid R. Moghadam: All right. So I think that was the last question. Thank you again for your interest in the company. And everybody enjoy the rest of the summer. We'll see you pretty soon, hopefully at Groundbreakers. Take care.

Speaker Change #108: Alright, So I think that was the last question. Thank you again for your interest in the company.

Unknown Executive: Thank you again for your interest in the company. And everybody enjoy the rest of the summer. We'll see you pretty soon, hopefully as groundbreakers. Take care. Thank you.

Graham: Everybody enjoy the rest of the summer we will see you pretty soon hopefully as Graham rakers take care.

Speaker Change #108: Yeah.

Operator: Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Unknown Executive: That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time.

Speaker Change #110: Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.

Unknown Executive: Enjoy the rest of your day. Thank you.

Speaker Change #110: [music].

Speaker Change #110: Yeah.

Speaker Change #110: [music].