Conference Transcript - PLD 2026-03-02

Speaker 3

Welcome to Citi's 2026 Global Property CEO Conference. I'm Nick Joseph here with Craig Mailman with Citi Research. Pleased to have with us Prologis and CEO Dan Leder. This session is for Citi clients only and disclosures have been made available at the Corporate Access Desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit any questions. Dan, we'll turn it over to you to introduce the company and team, provide any opening remarks, let investors know the top reason to buy the stock today, and then we'll get into Q&A.

Dan Letter, CEO

Great.

Speaker 3

Thanks for having us. You just said, yeah, just press the red button.

Dan Letter, CEO

There we go. It was on. There we go. All right. Thanks for having us. Again, I'm Dan Letter, CEO of Prologis. To my left here is Tim Arndt, our Chief Financial Officer, and to his left is Justin Mang, our Global Head of Investor Relations. Prologis, we are the global leader in logistics real estate. We have over 230 billion of assets under management. That's 1.3 billion square feet, 6,000 buildings in 20 countries in markets that represent 78% of the world GDP. We have about 7,000 customers in our portfolio. And our value proposition is quite simple, actually. We grow operating income ahead of inflation with the best portfolio and the best platform in the business. We create significant value through our development franchise. We have an unmatched development franchise going back nearly 30 years. Best-in-class, long track record that puts up consistently 30% margins. We allocate capital with discipline. It's supported by our A-rated balance sheet. And we have a scaled asset management platform, about $70 billion of third-party capital that we manage. this combination is really built to compound earnings and intrinsic value over the long term and we're also positioned for what's next AI is driving major demand in data centers we own or control 14,000 acres of land in these in these markets and we've been heavily focused on energizing that land bank and our portfolio for conversion opportunities we see these as very large durable opportunities with our energy business we've we've built an energy team over the last five years heavily focused on the solar and storage business where we generate 1.1 gigawatts of power growing to north of 2 gigawatts by 2030 and that power team helps us energize our data center opportunities globally why own the stock today really three reasons one the occupier market is improving. Two, we have very meaningful upside in our rent embedded in our mark-to-market, and there's significant value creation ahead in both logistics and data centers. So with that, why don't we get into questions?

Speaker 4

Hey guys, so it's been about a month and a half since you had your 4Q you call, could you give us an update on leasing activity and tenant discussions, and if you wouldn't mind, how does this compare to budget so far?

Dan Letter, CEO

Yeah, so I think the best way to think about it is we are performing in line, maybe even slightly better than our report from a month and a half ago. tenant discussions continued to be constructive customers were seeing them really just see past all the noise in the market they've become desensitized to all the headlines and really focusing on they seem to be much more on their front foot than they had been the prior couple years and you know it's it's interesting the people keep pointing out that our conference always coincides with macroeconomic event pandemics we had iran over the weekend and i'm just kind of curious

Speaker 4

this time last year we were feeling pretty good you guys were starting to see a little bit of or at least express some hesitancy around tariffs um so i guess at this point the inflection seems to be kind of here but what keeps you up at night that you know we've seen this movie before where things look good and then something pops up in the macro that slows demand is there anything right now that could be the the boogeyman here that could derail the recovery like i said we're hearing from our customers who are leaning in they're making decisions our leasing pipeline is elevated it's been elevated for the last year despite having three of the last five quarters

Dan Letter, CEO

our largest leasing quarters ever so the pipeline remains strong customers again after a few sluggish years they really started making decisions and when it comes to the chaos or or the noise of tariffs they just it they see it as more of a feature of today's environment than any sort of bug and it's it's not keeping me up at night you know what would keep me up at night is what is the next exogenous market impact that we just can't control. So what we do is we wake up every day, focus on what we can control, and that's really driving value creation through superior leasing and our development business. What impact, if any, does the Supreme Court ruling on tariffs have on industrial broadly or kind of leasing conversations? it again these customers are not phased by this current uh the the current decision um i don't think anybody's expecting to get a rebate or anything from from the the tariffs that they paid out over the last year uh and again we haven't seen anything slow by any means from our customers and on the call you know you guys had highlighted that market vacancy is likely peaked and you're beginning to see some market rent inflections across a few markets i don't maybe we could just dive a little deeper um and just give us some thoughts on markets that are improving the quickest and highlight some that could continue to lag maybe from both uh an occupancy and and market rent perspective yeah sure so right now we look at the overall market rent and we look at markets where we were seeing development take place because we see market rents growing at a replacement cost rent trajectory and those are right now sitting about 23% above market rents so it's about a 45 percent jump from where we are in place today to to the replacement cost rent we're seeing some building going on in the Sun Belt markets so that's where you're seeing those market rents have improved and we again see that as a trajectory for the for the coast in the next couple years if you had to highlight a couple domestic or even foreign markets where you're seeing kind of leasing activity accelerate the most versus the least what are like two or three that you'd point out that are two or three I would say Houston is very strong right now we're seeing the southeast really carrying more than its fair share of the weight Europe itself is its occupancy is better than the US so seeing the really strong demand drivers across northern Europe for instance Latin America Mexico continues to be strong Brazil we can't build fast enough. And actually, Japan, we're having some success, too, outperforming the market.

Speaker 4

And I guess I'd be remiss if I didn't ask about L.A. You guys had sort of mentioned on the call, and I feel like it was more directed at the Inland Empire, seeing some activity, but correct me if I'm wrong. Where do you guys stand on SoCal overall, and then maybe as you break it out between the IE, maybe East-West and L.A. County?

Dan Letter, CEO

We've been consistent for the last couple years saying that we see Southern California itself recovering two to three quarters after the rest of the country. We've seen large format space in the Inland Empire really were sold out of it. And now we've seen some growing demand in smaller spaces as well. As you get into the L.A. basin, really, it's Class A that's outperforming the more commodity space, if you will. keep in mind with southern california there's 24 million people in southern california 2.3 trillion dollar economy it's like the 10th largest economy in the world itself so long term in a market like california where of course there's headlines every day just shows how much harder it is to build in california we like it for the long term you know the question that that i get from from clients a lot i'm sure you guys get a lot as well is around the mark to market I know you know when I talked to Tim the cash mark to market only came

Speaker 4

down about a hundred basis points sequentially so it's been a bit stickier but there's always that concern about the pace of erosion could you walk us through maybe the math of how your mark to market may be a little bit more durable than maybe the market anticipates and how you guys also look at kind of stabilized cap rates versus, you know, going in cap rates given this backdrop?

Tim Arndt, CFO

I mean, the least marked market, if we just think about an inflationary or market rent growth environment that provides 3 or 4 percent over time, and we just held that constant, you would expect a least marked market to sit around high single digits, low double digits percent, and we are at 18 or 19 percent today. So whenever that question comes, I think that's the first thing that needs reminding is that, you know, we are at an abnormal and very favorable place today. And in the process of moving from about a 67 percent lease mark to market where we were for those invested with us at the time, we've together, you know, scooped in about a billion dollars of NOI, bringing it from that number to where we sit today. There's still another eight or nine hundred million dollars of NOI to clip we see in the lease mark-to-market today that'll come through the portfolio as we roll leases but I don't think you should look at the company and expect it to grow again meaningfully or or have any concerns likewise if it sat in the lower lower double digits that would be what one would expect mathematically. If we do have an environment where this gap on replacement cost rents closes more significantly, more swiftly, where we have market rent growth in the mid-single digits, let's just say that's not a forecast. I'm just saying if it did, we could see the lease mark to market expand again. But in the meantime, there's plenty of cash flow and NOI to harvest.

Dan Letter, CEO

And then you asked around stabilized cap rates.

Speaker 4

Yeah, just how, like, you know, I guess this is more a valuation, a public market valuation question. It's, you know, you're going in cap rate that's come down, but when the market comes in, it feels like, at least in our numbers, you're still in that low to mid 5% range on a stabilized cap rate. And sort of in your markets, how would that compare for a portfolio of your quality to what a private market transaction could go off at?

Dan Letter, CEO

I'll tell you right now, a very active private market transaction volume last year was normalizing, and we saw cap rates on a market base in the low fives. So depending on quality and size and market, so say five to five and a quarter, we saw that in unlevered IRRs in the low to mid sevens. So that is on the mark to market you're typically going to be in the mid fours then obviously based on an actual in place trying to capture that upside in the mark to market.

Speaker 4

And not to dwell on the mark to market but one more quick question because people sometimes view it as linear but between your legacy development pipeline what you bought with liberty and what you bought with duke like as we think about 27 and 28 can you brown numbers how much of that expiration a given year is could be this older vintage development leases that were signed well before the pandemic highs and rolled over to get a sense of like as we think about what 27 28 mark to market could be like how it could surprise some people to the upside given this development embedded.

Tim Arndt, CFO

Yeah without getting into the individual portfolios we have a very good way to get at what I think you mean there which is we have detail on our expiration schedule in our supplemental and you can unpack that at any time take that schedule take with it the knowledge that we we see market rents is about 19 percent above those in place numbers when you multiply that out and compare the expiring rent in each of the vintage years you just said, you see meaningful roll-up in 26, 27, 28, 29. It continues for a longer period than most appreciate, and that would be without any market rent growth today. That's just at spot rents.

Speaker 4

Does anyone in the audience have any questions? Maybe shifting over a little bit, you had mentioned development is coming back on the margin a bit depending on the market depending on the size range you guys clearly are are going to continue to deploy capital where it makes sense i think you know the three to four billion you had said about 60 percent of that is industrial 40 data centers how geographically how much of that ends up in the u.s versus in your other non-U.S. markets, which ultimately could end up in funds, right, and you could recycle some of that capital. And how much spec risk are you willing to take versus built-to-suit, which has been a higher component of that pipeline for you?

Dan Letter, CEO

It really is a market-by-market, deal-by-deal analysis that we do. This 14,000 acres of land is in dozens of markets around the globe. our teams while we've had slower start volumes last couple years have been getting the land ready to go so we can truncate those development periods when customers are ready to lease space so right now I think you should think of our build the suit volume as trending towards normal more like 40 ish percent that's probably a better number last year was rather high because we did start much less spec so it was more of a denominator issue but it was also a very big build this year but we absolutely have the appetite for spec and we've already started some spec this this year and you'll see us continue to do spec and and then some of the markets already mentioned southeast you know there's there's certainly certainly some pockets also where maybe the headline vacancy in the market may be higher maybe it looks like it's a seven or eight percent vacant market, but then we have a very focused sub-market strategy, and where you may see a headline, like I said, 8 percent, the market or sub-market may be 1 or 2 percent, and we're going to build into those, and just given the basket of opportunities we have in so many markets around the globe, it bodes well for our stir-fine.

Speaker 4

And I guess, and this is a harder question to answer because it is some market specific, but as one of the biggest developers in the country and the world for industrial, it feels like maybe there's a push and pull on, yes, you want to deploy that capital and get that incremental growth, but on the other side, if you hold back development, the markets could tighten quicker and you could get better market rent growth in a certain market or geography i guess how much of that is really true on holding back and tightening fundamentals quicker versus it's just smarter to put product in a market where you're leasing guys have no space

Dan Letter, CEO

so you don't lose tenants and maybe retention doesn't go down like talk a little bit about that push and pull yeah we're not sitting there trying to hold back the market or think that we have that much control of the market if you look at even in the u.s where we own 800 million feet that puts us at like what six seven percent of the overall market right now maybe it's ten twelve percent of the addressable market but when you take out a lot of the B and C quality stuff that we don't really compete against if you think about institutional grade so it is not a strategic mindset that we bring to these deals to say we can control the market by not not building we want to go build when the market fundamentals we see nine twelve eighteen months out are sound and and and and we want to have space to deliver for our customers so That's where our customer franchise comes in, and we do get that view of their pipelines, and we're going to just start when we think it's prudent and we can lease it per plan.

Speaker 3

A question that came in through LiveQA, I guess specific to the data center opportunity that you're seeing today, and the specific question is how can you compete with the data center REITs, or how do you think about your ability to compete there?

Dan Letter, CEO

Look at our company, right? We're in 100 markets around the globe. We've curated a land bank close to 78% of the world GDP, right? We've got hundreds of people in our construction team, our entitlement team. We've got this energy team that we've built over the last half a decade or so. We have the internal capabilities. A few years ago at our investor day, we said we're going to focus on building a pipeline and building a team internally. We have brought in experts from the data center industry to round out the team to ensure that we could enjoy as much of the upside in this business as we can. And so I see us as a leading data center developer in the world, not somebody that's following anybody else.

Speaker 4

And as we think about it, you guys kind of break out the different buckets to where you are in the power allocation process, right? And I think you're up to, I think you, what, 1.4 gigawatts that's either under construction or secured.

Tim Arndt, CFO

We have 1.8 secured and another 3.9 in advanced stages to total 5.7.

Speaker 4

And could you just talk about or clarify, like, when you have something in that 1.8 gigawatts, right, the under construction stuff is under construction. but the the power that is in that allocated bucket like is that you have an agreement with utility and you could go tomorrow on that if you have a tenant in hand everything is set up and then the stuff that's in the 3.8 is you're close don't have full allocation don't have a tenant there just trying to get a sense of like the time frames and what those exactly mean

Dan Letter, CEO

yeah you described it quite well okay we have lease negotiations underway as tim had talked about in our earnings call in january every megawatt we can deliver over the next three years is accounted for in some discussions of some sort so um that's the the advanced stages is really probably a year or two out. We're spending time, money. We have an allocation agreement with the power company. It just hasn't fully been codified at that point. So we expect all of that power to be fully secured within the next couple of years.

Speaker 4

Then I know the initiative from the administration is sort of the bring your own power. How would that impact the cost estimates that you guys have given? And I know it's more of a merchant building model, but, right, if you have to bring more of that on your own, build a substation, do all that, does that change the economics at all for you guys? Or do you get paid back by the tenant and through the sale of the asset?

Dan Letter, CEO

You know, it's interesting, in most of these situations, we are already building major infrastructure substations, upstream power generation and otherwise. So it's significant and built into the economics today, where I could see this being actually a benefit to Prologis is we actually have this energy team that's built an on-premise power solution. We've actually delivered that for a couple customers in the last year, and we have a program that we're launching that has actually helped us win business, helped us win business in logistics, where companies are looking for redundancy. they're concerned about fires or any sort of natural disasters that's helped us win business it's helped us win business on the data center front as well we're able to throw our hat in the ring because we can actually generate the power on site there's different costs in different locations we've we just launched a building in in the Netherlands for instance and that power is coming in pretty close to what the market power rate is but then it may be a little bit more expensive to do it in Southern California for instance and at the end of the day it is the end user that's paying for it and the best way to think about

Speaker 4

the the build out kind of 65 to 70 percent shell that kind of 30 to 35 percent turnkey is that sort of where you think it averages out over time yeah he mean our mix of how much we might engage in in power shell to to turnkey and yeah that's about right 70 30 maybe 75 25 something in on that order and then just on i know you guys talked more about the private capital business on the call the data center fund has always been a potential solution how far are you away from coming up with the final structure that you guys feel comfortable with with the data centers either fully outright sales or a fund with a stub ownership piece like where are we in the evaluation process and maybe where are you trending?

Tim Arndt, CFO

We're in about the middle of the game I would say. We've been at it in earnest for a couple quarters now dialoguing with large capital providers who see the advantages that Prologis has here and we have a pretty robust slate of options I would say up against them.

Speaker 4

All is just continuing in the format we've been in which is developing on our balance sheet and selling like that's a perfectly acceptable way for us to move forward so it's viable and one of the many things that we'll look at but if you unpack my commentary on time i would expect in the next one or two quarters you will know from us what we intend to do here and then just more broadly on the fund business because capital queues have struggled here the last couple years but i don't know if the increased commentary on the call suggests that our capital queue is getting better and we should expect kind of an uptick in this business and And if so, maybe just remind us what the earnings power from the private capital business at, you know, not full tilt, but a much better velocity could be for you guys.

Tim Arndt, CFO

I would say the capital flows are getting better in the sense, if you look at it in aggregate. market. So it is true that for a segment of it, which has been regular way core investing, that has been a more challenged pocket of our overall strategic capital fundraising. But that is also at play in why we have pretty greatly expanded our offerings going new public routes as we did at the end of last year in China and some new private joint ventures that we've announced in recent quarters and we'll announce more over this year. It's keeping pace with the direction of the market and the preferences of LPs to actually align with fewer GPs and ones with reputations like Prologis has. So you're going to see that as a long-winded way. You're going to see some new funds out of Prologis. And, you know, in terms of growth, you know, we've always said, you know, The return we can expect on core real estate is heightened by 100, 150 basis points in a strategic capital format beyond all of the diversification benefits it brings in terms of more investments, more customers, and a broader swath of capital to access.

Speaker 3

One of the topics we're exploring with every company is the ability internally to deploy AI for efficiencies or other opportunities. I guess, where are you today, where are you seeing the opportunities internally within Prologis? And I think the second question is, how do you think about getting those deployed? Is it from building? Is it buying? Is it partnering? Where is the opportunity and how are you actually going to execute on it?

Dan Letter, CEO

Yeah, we have been very forward-looking in our AI deployment. We were an early customer of ChatGPT at an enterprise level. We're a few years into this. One big effort that we did about five, six years ago was really organize our data as a company with 12,000 leases and 6,000 buildings. And using the proprietary data that Prologis has as a differentiator for us. And then deploying that now with the AI layer has been really, really significant. We use it in many different ways. Think about revenue management, we're able to work with these various models and we've got a team of data scientists that have really built this model, so it helps us track and keep our local teams focused on what the best possible rent outcome can be. So revenue management, we're using it in underwriting, we're using it in our design as well, so I'm really pleased. I don't think I've ever seen adoption. I think we've got 98-99% of the company using ChatGPT on a daily basis and then we're pushing for how we can use it to make better decisions. We're able to analyze 200,000 buildings across the United States with a certain model of scoring on each of those buildings as to whether or not we want to own that building long term. We're really leveraging all these various tools that we've built the last couple years.

Tim Arndt, CFO

I would just add, I think you also asked about build versus buy. It's all of the above right now. We're definitely building models at individual level can occur, but also some enterprise-wide tools.

Speaker 4

But there's certainly, especially as we get into areas that deal with financials or other components of the IT infrastructure, vendor-provided AI solutions are going to be relied on more heavily we're looking to use it all have you guys seen like immediate cost savings on either legal or quicker gestation to the leasing pipeline on your end because you're getting stuff through different departments like trying to just gauge the actual savings versus the theoretical savings that we all think is there but trying to put real dollars around it

Tim Arndt, CFO

have you guys been able to measure that at all on an roi basis in a word i would say no we are early innings on that um i think by a year from now we will have had ways that we can quantify that and figure out how we're redeploying those resources back into the company i think that's a theme that we expect to be more productive at the end of it all, and then that will require its own calculation on what it means to the bottom line. But we are still a little early on measuring it as it stands today.

Speaker 4

And I guess some of the headline risks the past couple of weeks have been on headcounts, and I am kind of curious as you guys are deploying this internally, is it something that legitimately could slow or reduce headcount, or does it just at least and the processes that you're putting forward free up people's time to do things that are more valuable, more strategic?

Dan Letter, CEO

Yeah, I look at it as, well, look how we run this company right now. We're at 35 basis points of AUM right now. So on the margin, how much can you really pick up in savings? What I see is tremendous growth for this company in the coming years and us being pretty flat as to what that means from a headcount perspective. Certainly much more flat than we would have been otherwise and that's why we've been early adopters in this technology and we have a very rigorous G&A policy around how we're viewing net new jobs and and it goes through the whole AI filter and as to what that job could look like in two three five years to ensure that we don't overload with with with too much G&A at a point when the whole market economy is is adopting to this new way of working and you guys you guys do a lot of these tenant panels and checking in and amazon's clearly

Speaker 4

one of your largest tenants like from a a tenant perspective and just industrial usage the the benefits or risk to ai i'm just kind of curious what your tenants are saying um you know as it relates to either agentic commerce, or are you seeing tenants who are actively taking space to support data center build-outs in certain markets?

Dan Letter, CEO

How is the AI initiative impacting demand, at least early on or through early conversations with tenants about how they may change their usages? yeah so what we have seen over the last 10 15 years has been all this discussion around automation and automation will somehow reduce the the need for our customers to take down their a certain amount of space or they'll slow their their their growth in in in their footprints but what what we've really seen in ai is just another layer on top of that the supply chain very complicated right and AI automation before it have really only helped solve the complex issues as service levels have continued to grow think of the end consumer in the US 70% of GDP is consumption right and service levels of getting your product that you order now in three hours versus two days from now and that's where we continue to see our customers say we're not slowing the need for more space we're just using these tools to help us navigate all of these complexities we have any other we have our rapid fire but did any other

Speaker 3

questions in the room all right what will same store NOI growth be for the industrial sector overall next year in 2027 cash five to six and then will Will there be more, fewer, the same number of industrial companies a year from now? Public.

Tim Arndt, CFO

I told Dan we should say many more.