Prologis Q2 2025 Earnings Call Summary and Q&A Highlights: Strong Build-to-Suit Activity and Leasing Pipeline Growth

Earnings Call
17 Jul

[Management View]
Prologis, Inc. (PLD) reported quarterly core FFO above internal expectations and executed record-high build-to-suit development, notably anchored by a major data center project in Austin. The company reported a diverse and expanding leasing pipeline, with 19% year-over-year growth as of quarter-end and significant activity by large tenants, particularly in space requirements exceeding 100,000 square feet.

[Outlook]
Prologis narrowed and increased full-year 2025 guidance for average occupancy, rent change, strategic capital revenue, development starts, and FFO, citing improved visibility and permanent NOI gains recognized during the quarter. The company expects continued strong build-to-suit demand, especially from Fortune 500 companies, and anticipates a rebound in high-barrier U.S. markets like Southern California.

[Financial Performance]
- Core FFO: $1.46 per share including promote income, $1.47 per share excluding net promotes, both exceeding internal forecasts.
- Occupancy: Ended at 95.1%, outperforming the broader market by 290 basis points.
- Same-Store NOI Growth: Net effective same-store NOI growth was 4.8%; cash same-store NOI growth was 4.9%.
- Development Starts: Initiated over $900 million of new development, with nearly 65% build-to-suit.

[Q&A Highlights]
Question 1: Ronald Kamdem (Morgan Stanley): What has been the post-Liberation Day impact on the leasing pipeline, and how does it tie to the decision to increase development starts and acquisitions?
Answer: The pipeline is up 19% year on year, with good balance across different deal stages and types. Growth is concentrated in larger customers, particularly those needing over 100,000 square feet. The $1 billion increase in development starts includes a $300 million data center start and a strong build-to-suit pipeline.

Question 2: Steve Sakwa (Evercore ISI): Can you provide more color on the cadence of leasing from 1Q into April, May, June, and the exit velocity in June?
Answer: Leasing volume was down 20% from normal in early April but accelerated through May and June, ending the quarter only down about 10% from normal. The pipeline and build-to-suit dialogues are strong, reflecting a full picture approach.

Question 3: Caitlin Burrows (Goldman Sachs): Can you provide more details on the guidance, particularly the factors driving the midpoint FFO guidance increase?
Answer: The environment has calmed significantly since April, providing improved visibility and confidence in the guidance. Outperformance in the quarter and permanent NOI gains contributed to the increase.

Question 4: Michael Goldsmith (UBS): How are you thinking about the timing of the growing pipelines translating to signed leases?
Answer: Decision making remains deliberate, with customers seeking clarity on the macro front. The pipeline is building, and the largest customers are finding it increasingly difficult to defer space needs.

Question 5: Tom Catherwood (BTIG): What is driving the bifurcation between space utilization metrics and the IBI activity index?
Answer: Utilization increased to 85%, reflecting growth in the supply chain and inventory build. The IBI activity index measures product movement velocity, which has softened due to economic uncertainty.

Question 6: Craig Mailman (Citi): At what point do you think tenants will become comfortable with uncertainty and the logjam starts to break?
Answer: The path to normalization is uncertain and dependent on macro factors. However, long-term fundamentals such as replacement cost escalation and labor shortages in construction support a positive outlook.

Question 7: Ki Bin Kim (Truist Securities): Can you provide more color on the 136 million square feet of leasing proposals?
Answer: The pipeline shows good balance across new and renewal leases, with larger deals taking longer to come together. Build-to-suit activity is the strongest it has been, driven by long-term planning.

Question 8: Vikram Malhotra (Mizuho): What scenario do you see for rents inflecting or real rent growth over the next two to three years?
Answer: Vacancy rates are expected to peak around 7.4%, with pricing power returning when vacancy drops to around 5%. Normalized net absorption should center around 250 million square feet annually.

Question 9: Nick Thillman (Baird): Can you provide an update on bad debt expenses and any specific industries facing credit issues?
Answer: Bad debt expenses are elevated, bouncing between 35-40 basis points, with no significant industry-specific issues. Strong retailers are taking share, and defaults have been NPV positive due to higher market rents.

Question 10: Blaine Heck (Wells Fargo): Which geographical markets could flip from being choppy to more competitive?
Answer: Markets with strong long-term fundamentals, like Southern California, are expected to rebound quickly. International hubs like Mexico City and São Paulo are already outperforming.

Question 11: Mike Mueller (JPMorgan): Will tariff dynamics cause you to pivot back to regional markets sold out of following the A and B merger?
Answer: Unlikely, as the focus remains on high-barrier and consumption centers globally. The company is in the right markets and will stay focused there.

Question 12: Samir Khanal (Bank of America): Can you discuss acquisition opportunities and pricing in the current transaction market?
Answer: The transaction market is resilient, with a focus on value-add acquisitions. Core returns are in the low sevens in the U.S. and low sixes in Europe.

Question 13: Vince Tibone (Green Street): What is driving the deceleration in cash same-store NOI growth in the back half of the year?
Answer: The deceleration is due to comps, with lower rent change contributions and more occupancy drag compared to 2024. One-time items and recovery noise also impact the back half.

Question 14: Brendan Lynch (Barclays): Can you update on expectations for a second-half inflection in occupancy and specific regions?
Answer: China is past bottom and improving, while Japan remains stable. The U.S. markets are working through excess supply, with the Midwest and Sun Belt showing better stability.

Question 15: Jonathon Petersen (Jefferies): How are you managing higher power demands from warehouse automation in a power-constrained environment?
Answer: Power demands for automated warehouses could increase 5x. The company is launching behind-the-meter energy generation solutions to bridge the gap as utilities struggle to keep up.

Question 16: Greg McGinniss (Scotiabank): What is the source of demand, and why are tenants choosing build-to-suit over vacant space?
Answer: Demand is diverse, with significant activity from Fortune 500 companies. Build-to-suit projects are large and location-specific, with limited spec space available for such requirements.

Question 17: Todd Thomas (KeyBanc Capital Markets Inc.): What is the updated view for full-year net absorption, and how is 3PL leasing demand trending?
Answer: Full-year net absorption is expected to be 75-100 million square feet. 3PLs are making their way through gray space and looking for incremental space, with confidence and pipeline growth.

Question 18: John Kim (BMO Capital Markets): Were there any changes to lease terms since Liberation Day, and what about the $28 million of termination income?
Answer: Lease terms are normalizing, with no significant abnormalities. The termination income was forecasted and factored into guidance, with resulting vacancy impacting the balance of the year.

Question 19: Jamie Feldman (Wells Fargo): What are the key overhangs on decision making, and what needs to go away for more aggressive leasing?
Answer: Decision making is influenced by macro uncertainty and the need for clarity. As other companies make decisions, it will create a comfort level for others to follow suit.

[Sentiment Analysis]
Analysts and management displayed a cautiously optimistic tone, acknowledging macro uncertainties while highlighting strong long-term fundamentals and strategic positioning.

[Quarterly Comparison]
| Metric | Q2 2025 | Q1 2025 |
|-------------------------------|---------|---------|
| Core FFO (including promotes) | $1.46 | $1.45 |
| Core FFO (excluding promotes) | $1.47 | $1.46 |
| Occupancy | 95.1% | 95.2% |
| Same-Store NOI Growth (Net) | 4.8% | 4.7% |
| Same-Store NOI Growth (Cash) | 4.9% | 4.8% |
| Development Starts | $900M | $850M |

[Risks and Concerns]
- Elevated bad debt expenses, bouncing between 35-40 basis points.
- Market rent decline of 1.4% and a rise in market vacancy to 7.4% in the U.S.
- Strategic capital net outflows of approximately $300 million.
- Deceleration in same-store NOI growth due to occupancy drag and unfavorable comps.

[Final Takeaway]
Prologis delivered a strong quarter, exceeding internal expectations and demonstrating resilience in a challenging environment. The company's strategic focus on build-to-suit developments and expanding its leasing pipeline positions it well for future growth. While macro uncertainties persist, Prologis' long-term fundamentals and strategic initiatives provide a solid foundation for continued success. Investors should monitor the company's ability to navigate near-term challenges and capitalize on emerging opportunities in high-barrier and international markets.

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