Q1 2025 Prologis Inc Earnings Call
Speaker Change: Hi, this is Timiothy Arndt. May 18th. During my state visit to the State Department last week I received a song request that I actorize in order todays classic song, which is So Please, Do Not Be Sad by Rihanna's Saturday Night Live Tour for the astro show.
. . . .
Justin Meng: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Speaker Change: Greetings and welcome to the Prologis First Quarter 2025 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, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce to you Justin Meng, Senior Vice President and Head of Investor Relations. Thank you Justin, you may begin.
Speaker Change: I'd like to state that this conference call will contain void-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management, police, and assumptions. [inaudible]
Speaker Change: Board-looking statements are not guarantees or performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the Board-looking statement notice in our 10K or other SEC filings.
Speaker Change: Additionally, our first quarter earnings press release and supplemental do contain financial measures, such as FFO and EBITDA, that are non-GAAP . And in accordance with REGG, we have provided a reconciliation to those measures. And in accordance with the financial measures, we have provided a reconciliation to those measures.
Speaker Change: I'd like to welcome Tim March, our CFO , who will cover results, real-time market conditions, and guidance, Amid Moghadam, our CEO , Dan Letter, President, and Chris Kate and Managing Director are also with us today. With that, I'll hand the call over to Tim.
Tim Arndt: Thanks Justin, good morning to everybody and thank you for joining the call.
Tim Arndt: Prologis delivered a very strong quarter. We released 58 million square feet, a near record, broke ground on several build-to-suit developments with key customers and expanded our power capacity by 400 megawatts to support growing demand for data centers, a 13% increase.
Tim Arndt: Prior to April 2nd, industrial fundamentals were improving and had it not been for the recent uncertainty from global tariffs and their downstream impacts, we would have raised our expectations for 2025.
Tim Arndt: Instead, we are electing to maintain Ernie's guidance as there are no policy conclusions right now to plan differently and our severe stress test to COREFFO supports the existing range.
Tim Arndt: While the instability created in the last two weeks made disrupt logistics and supply chains, it will certainly slow decision making.
Tim Arndt: Many companies now question where to source, manufacture, or even sell their goods. And speaking with customers, they echo this sentiment while at the same time revealing a need for flexible inventory positioning in the evolving landscape.
Tim Arndt: Let's be clear, the range of outcomes is wide. We see potential for recession, inflation, or possibly both. [inaudible]
Tim Arndt: and it's also not dismissed the potential for a quick resolution.
Tim Arndt: It's important to remember that Prologis was designed to weather any environment [inaudible]
Tim Arndt: We have a global footprint with a highly diversified rent role. Our revenues are contractual with fixed or inflation linked escalations.
Tim Arndt: Our fortress balance sheet has unrivaled access to global capital. And we are trusted partners in many of the largest institutional investors in our strategic capital business. All of this positioning Prologis to be a partner of choice for our customers, especially in turbulent times.
Tim Arndt: Before I review the quarter, let me share three high-level thoughts [inaudible]
Tim Arndt: Second, the current environment is an endorsement of our long-standing strategy to invest in markets where goods are consumed, not where they're produced.
Tim Arndt: Turning to the quarter-correct flow, including that promotes was $1.42 per share, and excluding that promotes was $1.43 per share, each ahead of our forecast.
Tim Arndt: Occupancy ended the quarter at 95.2%, down 70 basis points from year end, which was better than expected to principally to strong retention.
Tim Arndt: Arnett Effective Least Marked to Market End of the Quarter at 25% with most of the sequential decline driven by the increase of in place rents.
Tim Arndt: This 25% represents a further $1.1 billion of incremental NOI after capturing another 105 million during the quarter.
Tim Arndt: We've been describing the builders who pipeline has robust for some time and in the last several months decision making finally thought, which we believe highlights the need for space is real but what has kept volumes low is confidence. [inaudible]
Tim Arndt: We've over a dozen deals still in active dialogue today and in fact have signed an additional two transactions for 1.1 million square feet post April 2nd. The pace so far this year has been well ahead of normal.
Tim Arndt: In our data center business, 400 megawatts of power has moved to our advanced stage category upon agreement with utilities for projects in a Tier 1 market. .
Tim Arndt: We now total two gigawatts in this category alongside our 1.4 gigawatts of power, which is already fully secured.
Tim Arndt: Our conversations with utilities and hyperscalers alike have been very productive and we will have start activity to report for the second quarter.
Tim Arndt: And finally, at quarter end, we have over 900 megawatts of solar and storage capacity, either in operation or under development, advancing us closer to our one gigalot goal for the year.
Tim Arndt: with the US and globe both in great need for additional energy production and solar as the least expensive format, we feel great about the long term prospects of this growing business.
Tim Arndt: On the balance sheet we raised approximately $400 million in new capital for our flagship open-ended funds, yet had similar amount of redemptions leaving the capital raised near neutral and total.
Tim Arndt: We had a relatively light quarter of debt issuance with 550 million raised at a weighted average rate of 4.1%, including a Canadian bond transaction further insulating that currency exposure.
Tim Arndt: Our bounty remains in great shape as evidenced by the upgrade we received from Moody's Discordr to an A2 rating. Prologis now being one of only two public reads with an A-flat rating from both agencies. [inaudible]
Tim Arndt: Turning to the operating environment, which I'll cover by describing conditions before and after April 2nd.
Tim Arndt: The post-election uptick in leasing held steady throughout the quarter with improving proposal volumes and conversions.
Tim Arndt: We saw increased touch points with our global customers and higher activity levels, specifically within transport, food and beverage, consumer products and electronics.
Tim Arndt: Week by week, we were on the lookout for any slowdown in the level of interest or pace of leasing following the strong-fourth quarter, and while it did not manifest in our pipeline numbers, as early tariff threats came on and off an uncertainty grew mid-quarter, we did speculate that we would see a slowdown in decision making.
Tim Arndt: With all of that being old news, let's turn to an update on the last two weeks, what was ultimately announced on April 2nd clearly went beyond our early predictions, making the environment less certain.
Tim Arndt: Even with the pause in some tariffs or resolution of others, customers simply lack a steady backdrop upon which to plan their businesses.
Tim Arndt: We've now dialogued with more than 300 customers including two impromptu customer advisory boards representing over 20% of our rent roll. This is what we've heard.
Tim Arndt: Our customers are moving quickly to manage tariff volatility with many accelerating shipments where possible. They're also rerouting volumes and have urgent demand for overflow space.
Tim Arndt: Additionally alternatives, such as free trade zones and bonded warehouses are being evaluated.
Tim Arndt: Our customers were focused on food and beverage, industrial manufacturing, and essential consumer products like health and household goods are more insulated and are operating with confidence. But of course, customer selling goods with China-based production face the most uncertainty.
Tim Arndt: Price increases to consumers will be passed through, but they can't. The margins will still come under pressure. Therefore, planning horizons are shortening and flexibility remains key.
Tim Arndt: And customers like everybody are concerned about a recession where consumption and demand will be negatively affected further shaping their response.
Tim Arndt: In the last two weeks alone, we've signed approximately 80 leases for more than 6 million square feet. That's a roughly 20% dip from our usual pace and we expect things may slow further, but it does reflect a market that's still active.
Looking ahead here are some things we expect. [inaudible]
Inventory levels will increase as businesses stockpile and build resiliency.
Tim Arndt: E-commerce is likely to take a more share in an environment where product availability becomes an important factor to consumers in choosing how to shop.
Tim Arndt: Global markets will become more important with Canada, India, and Brazil among those in our portfolio that we expect to benefit Mexico will be another and it has stood out in terms of a growing level of interest pre and post April 2nd
Unknown Speaker 00.00.00
Tim Arndt: Turning to our guidance, as mentioned, our first quarter results in the Outlook would have called for a tightening and increase of guidance, including earnings.
Tim Arndt: We are reducing our development start guidance at our share to one and a half to two billion dollars which reflects a reduction in our expectations for respect development until visibility improves.
Tim Arndt: Our combined contribution and disposition guidance is also decreasing to a range of 400 million to 1 billion, again reflecting on certainty in both the capital markets and the fundraising environment.
Tim Arndt: In turn, we are reducing our development gain guidance to a range of 100 to 250 million.
Tim Arndt: We are also increasing our GNA guidance to a new range of 450 to 470 million in part due to the impact on capitalization from the lower development activity
Tim Arndt: Outside of this, all other areas of our prior guidance are unchanged with CoreFFO, including that promote expense to still range between 565 and 581 per share, and CoreFFO excluding that promote expense to range between 570 and 586 per share.
Tim Arndt: As I mentioned, we look carefully at our guidance in a severe stress test by examining the fallout from past crises, including the dot bomb era, the GFC, Brexit, and the early days of COVID.
Tim Arndt: GFC had the most extreme outcomes in terms of occupancy loss, rent declines, and defaults, which we mirrored and made worse by layering on additional levels of bad debt.
Tim Arndt: In this scenario, we see an earnings outcome that lands at the bottom of but within our range.
Tim Arndt: Anything can happen and we will reassess in the second quarter, but we feel good about the resiliency it reflects. Thanks.
Tim Arndt: In closing, we run the company in a disciplined way with the simple tenants to stay close to customers and invest capital creatively. So times like this do not call for dramatic shifts to our strategy.
Tim Arndt: We will be attentive to our customers and we will use our bounty wisely. We will leverage our strengths in securing
Tim Arndt: We will continue to harvest all that the platform provides in the way of profitable adjacent businesses that support our customers. And above all, we'll empower and rely on our people whose expertise and dedication are the foundation of our success. Thank you very much.
Tim Arndt: With that, I will turn the call over to the operator for your questions.
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 that your line is in the queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, or we pull for questions. Thank you very much.
Speaker Change: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Speaker Change: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Speaker Change: And the first question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.
Speaker Change: Are there lessons from prior disruptions, obviously mentioned the dot com and the GFC, but also from kind of the first round of tariffs during the first Trump administration that can serve as a guide for the current environment, maybe inform a what you're looking for to kind of judge consumption and demand and also what are the risks to consumers going forward? Thank you very much.
Speaker Change: Well, let me take a stab at that, Hamid here. Clearly, if we get into a recession environment, consumption will take a hit.
Speaker Change: But certainly our business and any other business in a recessionary environment will suffer. You'll handicap that probability. We're not really qualified to do that.
Speaker Change: But with respect to the relationship between consumption and GDP growth.
That relationship has remained constant for decades now.
Speaker Change: It's about 70% in the U.S., and it's lower than that in other...
Speaker Change: Emerging countries and coming up, increasing. So I'm pretty confident that the consumption in the long term will trend up.
and during a recession, it will take a hit.
Speaker Change: Now, as to the 2017 tariffs, I think we've shared this with you before, can't tell you what happened to Consumption, basically nothing happened to Consumption, that I can tell you, I don't remember the exact numbers, but what I can tell you is that since that date,
Speaker Change: U.S. production of things that are consumed in the U.S. went up 2% in real terms.
What was made in China went up by two percent. [inaudible]
Overall, consumption went up in the 20s, in the mid 20s.
Speaker Change: So where did that increase come up? Come from it came from China plus one and Mexico and to a lesser extent Europe so certainly we've seen some of these trends change
Speaker Change: The picture and the origins of manufactured goods, but again as we said many many times where they're consumed is what we care about and they didn't really do anything to where they're consumed or how much they're consumed. [inaudible]
Speaker Change: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Operator, next question?
Speaker Change: And the next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.
http://TheBusinessProfessor.com
Steve Sakwa: Yeah, thanks, good morning. I guess, Kim, just wanted to maybe focus a little bit on the leasing, the commencement.
Steve Sakwa: Thanks, Steve. Yeah. So look, we had a, the other side of the equation that you need to consider and looking at an occupancy drop in any time period is what are the, what's the role that's coming up? So we had a disproportionate amount of leases rolling in the first quarter. So well, I would describe our retention is pretty good at 73% just a lot rolling there and that caused the drop. I'd characterize the drop is not dissimilar from history and very much in line with our expectations. And so that's the end of the question.
Steve Sakwa: as for the second part of your question in the stress test that we looked at, or let me go back a quarter.
Steve Sakwa: You know, our prior guidance, imagine that we were going to lose some occupancy over the course of the year and build back up by the end of the year.
Steve Sakwa: One of the main changes in the stress test is that we are going to lose that occupancy as planned and even more. And it's going to basically stay at that level till the end of the year. And that's what we've reflected when we looked at the stressed scenario. And that's what we're going to do.
Thank you, Steve, operator next question.
Speaker Change: And the next question comes from the line of Ronald Kamdem with Morgan Stanley . Please proceed with your question.
For more information, visit www.FEMA.gov
Speaker Change: Chris, I'll jump in. So what I think you're talking about and is worth covering here is simply this category of Asian 3PLs. This is a category that faces new risks, but to keep it in perspective, the US businesses of these Asian 3PLs are just a little over 1.5% of our rent.
Now, policy is still evolving, and let's not speculate here.
Speaker Change: But as you come to your own views, a few things to keep in mind. One, these customers are growing in responses to general e-commerce growth as well as state side inventory fulfillment models. These companies have found a product market fit, and the product will still need to flow.
Speaker Change: Ultimately their performance is going to be subject to how policies evolve from here and we will keep you informed of the situation changes. Thank you.
Speaker Change: and you'll see that it's sold out and don't know when we're going to get some more.
Speaker Change: So the demand is clearly there but the challenge is getting the inventory in to fulfill that demand. So I think the underlying demand is pretty good.
Thank you Ron, operator, next question.
Speaker Change: And the next question comes to the line of Michael Goldsmith with UBS. Please proceed with your question.
Unknown Speaker 00.00.00
Good afternoon. Thanks for taking my questions.
Speaker Change: Joseph, I guess, you know, there's been some recent news about economists on being back in the market. Can you talk a little bit about what that means for overall demand, how that can impact the overall industry, and if that, you know, how that has influence breaking power in the past and effect and have an impact this time. Thanks.
Yeah, thanks. Thanks Michael, this is Dan. Thank you.
Speaker Change: We have definitely seen Amazon in the market as a matter of fact, we've signed some pretty good deals with them this year and we're seeing the overall e-commerce segment of our customer base.
Speaker Change: Very strong right now, back to high teens, 20% of our overall leasing, so really pleased with what we're seeing from them.
Speaker Change: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Thank you, Michael. Operator, next question.
Speaker Change: And the next question comes in the line of Craig Mailman with City, please proceed with your question.
Speaker Change: Thanks. That makes you a satiric Craig. In the opening remarks, you talked about the company looking to take advantage of opportunities. So I hope you could discuss that in more detail, will be their opportunities. You're starting to see emerge or kind of trying to keep an eye on where you would look to lean into if possible. Thank you.
Justin Meng: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Speaker Change: Too soon for anybody thinking about putting something on the market or selling something, certainly the last two weeks have not been the time to execute that strategy. So I think these things will take a while.
Speaker Change: I don't know where the 10 years are going to go, and Caprice are kind of correlated with that. So I think most people in this environment are going wait and see for some clarity. But depending on how bad this thing gets, it could be six months, maybe nine months before you start seeing some opportunities. Thank you.
Thank you, Nick, operator, next question.
Speaker Change: And the next question comes to the line of Caitlin Burrows with Goldman Sachs. Please proceed with the question.
Caitlin Burrows: Hi, good morning. Maybe just on lease gestation. I know it was above average in 4Q and then it was up again in 1Q, which makes sense. But can you go through some more of what you're hearing from customers and potential customers with respect to kind of who is making decisions today, what's driving them versus who's dragging out that decision making timeline and what could make them ultimately make a decision and then the group that might just say, for now, we're standing on the sidelines. Thanks.
Caitlin Burrows: Hi, it's Chris, I'll take a stab at that. So first, you're reading the statistics correctly, the gestation was elevated in a quarter, some of that's really happenstance and mix in the first quarter. So there's going to be some seasonality as it relates to December and November deals that just take a bit longer with the holidays.
and also the trend we discussed. [inaudible]
Caitlin Burrows: as a relates to pre-election opportunities landing that continued into January , lifting the number.
We think it will continue to remain elevated, there is a... [inaudible]
Caitlin Burrows: Economic backdrop, tariff backdrop to make decisions. But there are a handful of customers making decisions. Some are responding to supply chain volatility and bringing in goods urgently for their own tactics.
Caitlin Burrows: Yeah, I think you see that in the 3PL utilization rates because that's the first place you're going to go. And remember, a lot of these people have been in delaying decision mode for a number of years. And if they're underlying businesses are solid, they can't do that anymore. Perhaps the most. [inaudible]
Caitlin Burrows: Surprising thing that I've seen is that even in the last two weeks... [inaudible]
We signed a lot of releases and we've signed filter suits. [inaudible]
Caitlin Burrows: and these customers could have just said, okay, let's punt on those until we have clarity. So I'm actually very encouraged and you can't take two weeks and extrapolate too much but actually in those two weeks.
The number of built-in suits that we have signed. [inaudible]
So, but it's two weeks, so who knows, but um...
Caitlin Burrows: But there are definitely people out there making decision, and I wouldn't be surprised if the vast majority are going to try to delay it as much as possible. But you know, water is building behind the dam. It's going to break at some point.
Speaker Change: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Thank you, Caitlin, operator. Next question.
Speaker Change: And the next question comes from the line of Vikram Malhotra with Mizuhau. Please proceed with the question.
Vikram Malhotra: Good morning. Thank you for being the question. I just want to clarify kind of the stress test scenarios. Maybe you can give a little more color you talked about.
Vikram Malhotra: where you thought the occupancy was in the down cave. You mind just giving us a sense of like where did rent market rent shake out for the quarter, where did sort of net absorption on in your market shake out for the quarter and then if you take those you know those other components where where are they in the stress test in terms of low end and high end. Thanks.
Okay, I'll take on the stress test.
Vikram Malhotra: Description, and Chris can hit some of what happened during the quarter. Basically in the GFC what we had seen in the first 12 months period at least was...
Market occupancy decline of 170 basis points.
Vikram Malhotra: We took that in, added it to the client that we had already, and as I mentioned earlier, just had it sustained through the end of the year.
Vikram Malhotra: We had seen market rents drop 18%. We brought that into the forecast, had it effective immediately. Instead of playing out over some months, just took it up front.
Vikram Malhotra: And then the last piece is bad debt. Our experience in the GFC was bad debt of 56 basis points. We actually have integrated a higher level there by...
Vikram Malhotra: picking apart parts of our portfolio, have something that's closer to 75 basis points on an annualized run rate, so we think we hit it pretty hard. [inaudible]
Timothy Arndt: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Timothy Arndt: Yeah, and the thing I want to make sure everybody understands you're we are not setting up a new range this is not a prediction. We just wanted to know what's the worst thing that can happen of course the worst thing that can happen is nuclear war and you know this is all academic but. Yeah.
Timothy Arndt: But please, this is not a prediction. We are incapable of making a prediction in this environment, and there's no data, and we have more of it than anybody.
Speaker Change: can power us to confidently, confidently predict anything for you. So we just wanted to know how about it could get.
Thank you, Vikram, operator, next question.
Speaker Change: And the next question comes from the line of Keybing Kim with truest securities, please proceed with your quest.
Thank you, good morning.
Speaker Change: Do you have a sense of what the level of import terrorist, your average customer could possibly bear? I know there's a wide range of customers, but this high level question. And, you know, I'm not sure if a 10% terrorist will win for your customers, or does it have to be a 5% just any kind of the cost you can share. Thank you.
Speaker Change: Yeah, again, this is pure speculation because we haven't had any discussions for these kinds of tariffs. I think since the turn of the century. But my sense is that given the way this policy was rolled out,
I think people were prepared for something around 10 percent. [inaudible]
Speaker Change: But on April 2nd, the base guy would say if you pulled our average customer, they would have said, A, we don't know, and B, it's going to be a lot higher.
I think that the economy can absorb 10% here if...
Speaker Change: I think if I were going to predict anything, I would say Mexico would be a big beneficiary of all this, so would Brazil, and we would probably have less coming from China for sure.
Speaker Change: and the country surrounding or around China in Asia would have a higher share. And Europe I think is going to probably tread water or maybe decline a bit, because there's still...
Speaker Change: You know, Germany, the big exporter, is, it's very focused on internal combustion cars and, you know, and I think those are going to come under pressure. So, so that's what I think it's going to happen. But who knows?
Thank you, Stephen. Operator, next question? Thank you.
Speaker Change: And the next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.
Vince Tabone: Hi, good morning. I wanted to follow up on the comment that a disconnected world requires more warehouse space. Can you just elaborate on that remark and how you arrived at that conclusion?
Speaker Change: Yeah, Vince, let me tell you a story. I was in Brazil when Brexit was announced.
Speaker Change: By time I got on the plane and landed in San Francisco, the market had discounted the value of our UK portfolio by more than its entire value.
Speaker Change: Okay, and I was bombarded by questions of what's gonna happen, and what do you think is gonna happen to your UK business? Are they written off more than a hundred percent of the value or UK business in the stock during that, you know, ten hour flight?
Speaker Change: What did happen for the ensuing three or four years? The need for inventory increased?
Both in the UK and in the continent. [inaudible]
Because...
Those supply chains that were optimized across
Speaker Change: in the UK. So, these things don't play out the way some of the newspaper articles talk about it. And that...
Speaker Change: and we believe that duplication of what is a highly engineered supply chain during times of uncertainty will lead to more inventory, and therefore more space to put it in.
Speaker Change: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Speaker Change: And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck: Great, thanks. Can you talk a little bit more about any change you might be seeing in demand from your fund investors? How they're thinking about their allocation to the industrial sector overall? In current pricing? And I guess whether you'd expect to see increasing redemption requests in the funds in the coming quarters? Thank you very much.
Blaine Heck: The answer is we were seeing a really strong positive trend living up to April 2nd and lots of discussions and lots of interest and inquiries and reversing queries and all that more than any time I would say since 2022.
Blaine Heck: After April 2nd, I think people are waiting to see what the denominator effect is going to be. I mean, it's not a real estate question. Real estate is a percentage of allocation of the overall portfolio. And the stock market is down, I don't know, teens. So by definition. [inaudible]
Blaine Heck: Even with increasing real estate allocations, it could be that the absolute dollars available for real estate are going to go down.
Blaine Heck: Also, a lot of wind solutions have committed, maybe over committed to some private access classes.
Venture, Private Equity, etc., etc.
Blaine Heck: and the liquidity coming out of those coming back from those.
Blaine Heck: is certainly going to be curtailed. I mean, there are fewer IPOs that are going to happen in this uncertain environment, and liquidity events are fewer and farther between. So I think it's the denominator effect that will affect, that will, you know, determine how much money will come out, not so much interest in industrial real estate, which was really good and getting better.
Thank you Blaine, Operator, next question. Thank you Blaine.
Speaker Change: And the next question comes to the line of Mike Mueller with JP Morgan, please proceed with your question.
Mike Muller: Yeah, hi, how do you see UPS is downsizing Amazon exposures in the next couple of years?
Hey, Mike, could you repeat that please? [inaudible]
Speaker Change: We've, our business with UPS has continued and we've done actually some pretty significant leases with them lately, so I don't know. That's not something that's come up in our discussions, that's them.
Timothy Arndt: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Thank you, Michael. Operator next question.
Speaker Change: and then next question comes from the line of Samir Khanal with Bank of America. Please proceed with your question.
Speaker Change: Good afternoon, everybody. Just looking at the smaller spaces below 100,000 square feet.
Speaker Change: You know, that 92% occupancy seems a bit lower versus the other sizes, I guess, that was a bit surprising.
Thanks, Samir. That $100,000 square foot and less-
customer base,
Speaker Change: is typically actually the lowest occupancy you see if you look quarter over quarter in our supplemental, there's nothing unusual this quarter or last quarter that would suggest there's any issue there.
as a release of the American markets.
Speaker Change: Houston, and increasingly Dallas, and we're also seeing an inflection and improvement in the Midwest. So, pick a market like Indianapolis. That's one that's really moved a lot in the last year.
Speaker Change: The smaller spaces actually have shorter lease terms so that's where you see a lot more churn and certainly if you look at that customer base it's going to be the smaller businesses that may have more of an impact so we're paying very close attention to it but we're just not seeing anything today. [inaudible]
Speaker Change: If you believe in a recession scenario, that sector is going to get hit more.
Speaker Change: Protection on the supply of smaller spaces. They're very expensive to build. And while I'm on that topic, let me answer a question that hasn't come up, which is that in this environment and its inflationary effect, we're seeing replacement costs go up significantly. Effectively.
Speaker Change: and with 10 year back and up, their yield requirements on development has gone up significantly. So the combination of those two means that the replacement costs rents.
Speaker Change: that will justify a new construction are now much higher than they were a month ago. And I think that that votes well for the long-term supply picture here. Let's supply.
Thank you, Samir, operator. Next question?
Speaker Change: And the next question comes in the line of Brendan Lynch with Barclays. Please proceed with your question.
Brendan Lynch: Well, it's going to be influenced mostly by occupancy from here. You know, that's a stat that's pretty volatile to the quarter.
You're over a year, I'll say, differences in free rent.
Brendan Lynch: for releases that are commencing within these quarters. So it can be volatile for that reason. It's a net effect of both are going to be largely a function from here of the over your occupancy changes, which we've already made clear we think. Thank you, Adam.
Brendan Lynch: You know, in our base case, that was going to march down and in our stress case, still the case and a little more so.
Speaker Change: Yeah, the main driver of that is the market, basically. It's not at this point a change in near-term increases in market rent and occupancies are tough to predict but if our gun vet are probably going to come down a little bit if this thing continues.
Justin Meng: Justin Meng, Unknown Executive, Justin Meng, Timothy Arndt, Timothy Arndt, Timothy Arndt,
Thank you, Brendan. Operator, next question?
Speaker Change: And the next question comes on the line of Michael Carroll with RBC. Please proceed with your question.
Unknown Speaker 00.23.01
Speaker Change: So, if activity was pretty healthy in the first quarter and slowed down 20% in April , and I understand it's only two weeks so far, when could that actually start to impact police commandments and your overall occupancy? I mean are we talking about this being a two-q type issue or is it more of like a three-q type issue?
Chris Caton: I'll give you a couple facts here, and others may jump in. This is Chris. This is Chris.
Chris Caton: and then new lease commencement can be really rapid. We've had a handful of customers want to move in in a couple of weeks, up to order a magnitude maybe 45 days. So it really depends on the mix in terms of new versus renew and also the size. [inaudible]
Speaker Change: Yeah, new buildings, it takes longer because they got to build it out.
Thank you, Michael, operator, next question.
Speaker Change: And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
John Kim: Thank you. Going back about a month ago, Hamid, you discussed in a Bloomberg art interview.
John Kim: that the change in tone has slowed in the past couple weeks prior to the interview, not really reflected in the data, but that has happened. So I guess my question is, if the terrorist uncertainty is the result, will the men completely recover to where it was earlier this year, or were there other reasons tense we're acting more cautious pre-aper seconds? [inaudible]
John Kim: No other reason that I can think of. And by the way, if I knew the answer to your second question, I would ask you, where do you think the market's gonna end up at the end of the year? I don't know. I mean, short term is very hard to predict these things. [inaudible]
John Kim: That's why I don't even try. But long term is what we're focused in around here and the path to that long term can take many different directions.
Thank you, John . Operator, next question.
Speaker Change: And the next question comes with a lot of Nicholas Yulico with Scotiabank. Please proceed with your question.
Nicholas Ulica: Thanks, I want to go back to the some of the net absorption data you talked about. I think Chris, he said in the first quarter it was 21 million.
Nicholas Ulica: A year ago, it was in the first quarter, it was 27 million, and you guys were saying that wasn't a great number, and end up reducing an absorption forecast for the year. So, just trying to understand is,
Nicholas Ulica: Is it right to look at that number year, or year, or could it?
Nicholas Ulica: TLD having what he thought was sort of a better leasing quarter overall but maybe the market's not also reflecting that.
Nicholas Ulica: Yes, the first quarter is seasonal. It's a seasonally-like quarter, so the 21 annualizes to around 150 and 110. There can absolutely be variability in the numbers, as I think you've postulated in your question. I think more important to us is the conversation we're having with our customers and their growth requirements and their growth outlooks. [inaudible]
So that's how we made our assessment.
Nicholas Ulica: Yeah, and last year we didn't have an election. So a lot of decisions on leasing that would have turned into actual leasing and occupancy in the first quarter would have made it made in the fourth quarter, which was still an unknown from an election point of view. So there was a big uncertainty that didn't exist.
Nicholas Ulica: Let me add one more point here, actually, something Prologis can control. We had about 12% of our rent roll rolling this year.
Nicholas Ulica: We actually have put 7% of that in the bank already, so we're about 60% of the way through that, but only 5% of that left to go, so we're in pretty good shape at this point in the air.
Thank you, Nick, operator. Next question.
Speaker Change: And the next question comes to the line of Steve Sakwa with Evercore ISI. [inaudible]
Is it the final question? Please proceed with your question.
Steve Sakwa: Yeah, thanks for squeezing in the follow up. Tim, just to go back, I just want to make sure, I understand that there's kind of the base case and there's your kind of worst case scenario, but in your base case, and you did mention that, you know, in the last couple weeks, at least in volumes, you're down 20%. I guess I'm just trying to figure out what... [inaudible]
Steve Sakwa: in terms of either reduction or increases in leasing kind of from here through the end of the year.
Steve Sakwa: It's hard to put a number on that because ultimately we reflected in the occupancy drop that we think is going to be more severe and stay low, as I mentioned.
Steve Sakwa: That's a mix of both lower retention as well as a slower pace of new leasing and the way we tested all that was put it through some ranges. So it's just one of those things that is unknowable but I think the end result which ultimately drives occupancy, seems to be earnings. This is the end of the series.
We've got covered in the stress test. [inaudible]
Steve Sakwa: So that was the last question. So to close out, just want to make a couple remarks around the fact that, you know, no doubt we're in a very fluid environment right now. The good news is we are built for this.
Steve Sakwa: and I really want to thank our teams out there for their execution and focus. Thanks for joining the call and we'll speak to you next quarter.
and ladies and gentlemen, that does...
Steve Sakwa: Conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you very much.