On Tuesday, 04 March 2025, Prologis Inc. (NYSE: PLD) presented at Raymond James & Associates’ 46th Annual Institutional Investors Conference, offering a detailed strategic overview. Led by CFO Tim Arna, the discussion highlighted Prologis’s strong position in logistics real estate, resilience in the face of tariff uncertainties, and ongoing growth opportunities driven by e-commerce. While market rents have seen a recent decline, the company remains confident in its long-term asset value and diverse revenue streams.
Key Takeaways
- Prologis expects a 50% rental uplift from current and replacement cost rents.
- Moody’s upgraded the company’s credit rating to A2, reflecting a strong balance sheet.
- The company is investing heavily in data center conversions, with $1.5 billion already allocated.
- Prologis projects e-commerce to account for 30% of retail sales by the decade’s end.
- Despite tariff impacts, Prologis maintains a strategic advantage with its focus on consumption-driven markets.
Financial Results
Prologis is poised for substantial rental growth, with a 30% uplift from current market rents and an additional 15% from replacement cost rents, leading to a compounded 50% delta. The company’s balance sheet is robust, with a recent upgrade to A2 by Moody’s and leverage at approximately 25%. Historically, Prologis has achieved development margins around 30%, creating $13 billion in value from $47 billion of real estate developed over 23 years. The company also maintains a strong dividend payout of $4 billion annually.
Operational Updates
With 1.3 billion square feet of assets across 20 countries, Prologis generates 86% of its net operating income from the U.S. The company’s development run rate is between $4 billion and $5 billion per year. A significant focus is on data center conversions, with $1.5 billion invested and a $700 million monetization from a Chicago project in Q4, achieving a 100% margin. Prologis has identified approximately 10 gigawatts of redevelopment opportunities over the next 5 to 10 years.
Future Outlook
Prologis anticipates rental increases in the fifties percent for the current year, despite a 7% decline in market rents over the past year. The company expects e-commerce to reach 30% of retail sales by the end of the decade, further bolstering demand for logistics space. Strategic capital initiatives will continue to expand Prologis’s portfolio and generate fee income.
Q&A Highlights
During the Q&A session, Tim Arna addressed the impact of tariffs, noting that while they have not significantly boosted U.S. manufacturing, they have shifted production to Southeast Asia, Mexico, and Europe. Arna emphasized that policy uncertainty might slow customer decision-making but remains optimistic about Prologis’s long-term demand and portfolio strength.
In conclusion, Prologis remains a formidable player in logistics real estate, leveraging strategic positioning and diverse revenue streams to navigate market challenges. Readers are encouraged to refer to the full transcript for more detailed insights.
Full transcript - Raymond James & Associates’ 46th Annual Institutional Investors Conference 2025:
Jonathan Hughes, Real Estate Analyst, Raymond James: All right. Good morning, everyone. Thank you for joining us. My name is Jonathan Hughes.
I’m one of the real estate analysts at Raymond James. Pleased to have the Prologis team with us again this year. We have CFO, Tim Arna, up here, and he will give you an overview of the company, what they do, how they drive value. And, afterwards, we’ll have, some time for q and a. So, Tim, I’ll turn it over to you.
Thanks for coming.
Tim Arna, CFO, Prologis: Yeah. Great to be here. We always love this conference. It’s great to see so many of you here this morning. So I’m with ProLogist.
As, as was mentioned, I’ve been with the company twenty years or so, and we are the world’s largest owner of logistics real estate. We own, assets in 20 countries around the globe, about 1,300,000,000 square feet. I’ll get in to some of the details of that in just a moment. But with it being a tariff Tuesday, it’s probably a good place to start here on page four, just a little bit of a description of what is the supply chain, where the logistics facilities play their part, and where is ProLogist situated in it because what this is attempting to, to relay is that there’s a lot of warehouse or logistics facilities that have different purposes in the supply chain going from the production end where raw materials are stored, then goods are produced, stored again before they get onto, ships or trucks or rail to go off into further facilities where they’re broken down, put into infill city, last mile distribution facilities, ultimately, onto consumers. Where you see the little Prologis logos there, those circles, that’s where we’ve put our portfolio, which is saying we’ve put it around the consumption end of the supply chain, having us be relatively indifferent to where goods are ultimately produced.
And we’ve seen that over the last eight years in the age of tariffs and, everything that’s gone on with trade recently, as goods are moving from production in China to Southeast Asia, maybe to Mexico, we’ve actually seen a big increase in Europe. Ultimately, if they’re consumed in the big, large consumption centers, largely populated major cities of the globe, which is where our portfolio is, our demand has actually been quite quite steady. But, I’m sure there’ll be some additional questions on on the implications of tariffs later, which, which we can take on. You know, stepping back broadly, logistics has benefited greatly from, really the age of ecommerce. I would go back about fifteen years now as ecommerce began to take foot in the way we consume goods.
I’ll explain why that’s such a large demand driver for us in just a few slides, but it’s more than just e commerce on its own. What what e commerce and Amazon really have brought along for us is a much higher level of expectation and service around the way we consume goods, more product variety, faster service, faster delivery, more flexibility. All of that has required that the supply chain and warehouses get closer into consumers, not further out, which is the way it used to work in the decades prior. You could always go further out, get the cheaper warehouse. Now this is a strategic asset for retailers and and consumer companies, so they need to be close into, population centers, which then when you look at that against what’s on the right side of this page, well, where can new supply be?
And and we like to joke that, you know, we’re not making any more land anymore. It’s harder and harder to get, distribution facilities and warehouses in closer to consumers because, frankly, none of us wanna see a warehouse in our backyard even though that’s actually how we get all the things that we need. So that combination of rising demand and need and much more limited and challenging supply has made the sector very strong for the past fifteen years or so, I would say, in particular. If we widen out and look at what are the demand drivers more generally, we divide it into these three three categories, basic daily needs, which are the things on our desks here, our our our our water, toiletries, cosmetic, food, beverage, etcetera. Cyclical spending makes up about another third, which is gonna be housing related, auto furnishings, etcetera.
And then structural trends is where we point back to things like, again, ecommerce and the and the transition of supply chain modernization that goes on really in all of the economies that we that we operate. So to spend another moment on why e commerce is so popular, or or powerful, I should say. One, you just see its penetration, how much retail sales is occurring in e commerce. You can see it’s nicely had a pattern here of being almost approximate to the year that that we’re measuring, meaning twenty twenty three, twenty three was about 23% of retail sales, ’24, about 24% of retail sales. We actually think we’re gonna see that pattern continue, until about the at least the end of this decade where we think there is further penetration in e commerce up to about 30% of retail sales.
I noticed this morning as Target was releasing, their somewhat more, you know, muted, sales report. Their e commerce component of their sales rose 9%, though, which is a really good trade for us. The reason it’s so good, what the right side of the slide is explaining is that for the same $1 of retail sales being executed in the brick and mortar channel, it takes three times more logistics space to execute it in the ecommerce channel. And that’s because the the warehouse is not being used to just store goods and move large pallets back out of that warehouse and into the back of a store. You we all know that box is being unpacked there.
Individual parcels are being assembled there, sent out to all of us. The warehouse now also takes returns. The warehouse has much more product variety than stores have had in the past. So all those things aggregate to three times more floor area needed in logistics. So you put the two together, there’s a point more of penetration every year by year that got accelerated through COVID.
You need three times more space. And now there’s also the pressure of, brick and mortar retailers needing to compete with that model and similarly needing to get in closer to consumers and replenish their stores. If I add a third element to it, frankly, it’s, well then what is the ability to pay for these more modern facilities, closer in facilities? The left side of the chart here has a breakdown of supply chain costs in the view of our customers, where only 3% to 6% is the is the warehouse cost on its own. The vast majority is is, wrapped up in transportation labor costs.
So this, in a normal environment is an easy trade for our customers to make to get more functional, closer in facilities, win out on achieving the sale in the in the in the first place, and that transfer that savings can be, in things like transportation labor can easily pay for increases in rents. And so we’ve seen that on the left side of this chart, you look at net effect of rent. This was an error, if I had more time here, it’s been a few minutes on, how logistics rents performed in past cycles and really prior to the age of e commerce and everything. But the the short story is that they were often very flat. Didn’t see a lot of market rent growth in logistics rents.
And then you see this very powerful upswing, through the February, through COVID. Yes, rents overshot in COVID, namely in in very large markets like Southern California. Rents, went up two and a half times through COVID, and that’s one of the markets that is the largest culprit of the little bit of decline that you see. I like to imagine more. We should actually draw it on here, you know, kind of a dotted line between pre COVID and today.
And let’s just accept that, yeah, they overshot and are now normalizing, but there’s still tremendous rent growth that the portfolio has received. And then one thing that is imperceptible on the chart is that logistics leases tend to be about five years in length. And so what that means is that, let’s let’s say, 80% of our portfolios, 60% of our portfolio, Many of our leases have not yet rolled up to the higher market rents generated through COVID. We measure that actively in our portfolio and report it out as something we call the lease mark to market, which is just how much higher our market rents than what’s in place today. And, for us, that’s still about 30%.
And, there’s an additional concept of, well, what what are replacement cost rents? Beyond market rent, what is the rent needed of the next marginal developer to build the next building? And we estimate that rent is another 15% above that. So the overall compounded delta between rents that we have in place today and what we think the rents are gonna needed are gonna, be needed to be to spur new development is 50% beyond what’s in the portfolio right now. So Prologis, for our part, just backing up, you know, our S and P one hundred company.
We just actually received a credit rating upgrade from, Moody’s yesterday to a two, so we’re a flat in a two with Moody’s and S and P. If you don’t follow REITs, that is the best, credit rating in all of REITs aside from, we’re tied with another company, Public Storage, who doesn’t use debt, so I don’t really think that’s a fair comparison. So, we’re very proud of the balance sheet we’ve built for, $200,000,000,000 of assets that we have, under our management. And what’s on the screen here just demonstrates all of the other areas that we, that we run the company in. I think beyond our large portfolio and operations, our other principal businesses are to develop new logistics facilities, which is on a run rate of $4,000,000,000 to $5,000,000,000 per year.
I’ll spend a couple more moments on that in just a second. But we also have a large, call it private capital, private equity. We call call it strategic capital, but, asset management business, where we run about a third, a little over a third of our assets within specific asset management vehicles. This generates fee income for us and really enables us to lever our capital and have a much larger portfolio, around the globe. This is a snapshot of where we sit on a global basis.
The numbers at the bottom, 86% of NOI. NOI is basically the rental income, net of its expenses. When you look through our own balance sheet and our proportionate share of all the ventures that we manage that I just described, we’re we’re able to run this very large global portfolio, which is essential in logistics for our customers, but 86% of our NOI comes out of The US. So it’s a very stable financial model in that regard, highly hedged. We’re not vulnerable to fluctuations in, in effects rates in that regard.
We’re around most of Western Europe and Central Europe as well. In Asia, we’re in China. Our largest market is Japan, Singapore, and we’ve just entered India, recently. I’ll steer you quickly to the right side of this page, which is trying to explain a little bit more about our business model, how our operations intersect with that development business and and this asset management business, which is of that 4 to $5,000,000,000 of new assets that we build every year. We tend to build that primarily on our own balance sheet.
And then what we do with these with these vehicles that we manage is it’s offered up to them to, to buy that asset. It’s not a put. It’s not a call on either part, but it’s offered up at appraised value. And typically, you know, the way the model kind of works is, let’s say, an asset costs a hundred dollars to build. Our historical margins have been about 30%.
So post building and leasing that asset, it might be worth about a hundred and $30, let’s say. It gets offered to the vehicle at that price. They give us, cashback of you know, it’s consideration in total of that $130. What we tend to take back is some partial interest in the vehicle to uphold our ownership interest and then the cash back, and then we plow that cash back into next year’s development. So it’s this self funding model where we’re creating and crystallizing that $30 in this example of value creation every year, year in, year out, while retaining an interest, in the, in the real estate itself, generating new fee stream, and expanding the portfolio for our customers.
A quick snapshot of where we’re located. This is just, expanding on the point that we tend to be around, the high consumption markets of both The U. S. And around the globe. So I’m from Cleveland, Ohio, for example.
I love Cleveland, but we have no assets in Cleveland. We have no assets in Detroit. Markets like this, these are smaller markets where we may tend to see some uplift from, onshore manufacturing, for example. We don’t really think so. I can expand on that later, but that’s, that’s part of the story that we’re often debating with with investors and, and ourselves on are these the attractive markets for us.
But I think when you put back into consideration that if we saw some upswing in manufacturing or production in some of these secondary or tertiary markets, that could evaporate again in the next administration if we have a really different approach to to trade again. And so what we wanna do is we wanna be where you see us here, New York, New Jersey, Los Angeles, San Francisco. South Florida is a big market for us, Atlanta, Dallas, etcetera. Just a little bit on the balance sheet. As I mentioned, we’re the upgrade yesterday, we didn’t update the slide yet, but we’re A2 now with Moody’s.
But in real estate, you know, I twenty, twenty five years ago, when I started in real estate, I used I I learned that you financed real estate 80% levered, which is shocking to me now. REITs really learned powerful lessons through the great financial crisis. We have, drove our balance sheet to be about 25% levered. We think that’s adequate for a little bit of financial, you know, accretion down to the bottom line, but we want to keep a lot of optionality and stability in the balance sheet. And, I’m really proud, I have to say, with the way that we’ve moved the balance sheet up to, the current rating and strength that we have today.
Quick look at just who are the typical customers of Prologis. So, you know, across this 1,300,000,000 square feet, over 6,000 buildings, we are merely leasing the building. At times, we have confusion on that from investors if we’re doing anything with regard to the operations internally. Not at all. We merely lease the building.
And so you see, you know, it is, our largest customer is Amazon. At that scale, I think we are their largest landlord, but only about 5% of our rent roll is is, tied up in Amazon. And across our top 10 customers, only 15% is exposed to those top 10. So we have a highly, highly diversified rent roll on that basis. And you can see not just the the names that are involved here, but probably what’s more important is a look at the segments that the portfolio serves.
And, manufacturing is not listed up here. I think it’s embedded down in the other category. Going back to this production comment, we do have some of the portfolio, that is steered towards manufacturing, but that’s really in, in components of our Mexico and also Eastern European markets, where we see a little bit more of that. But by and large, it’s all consumption and distribution oriented. Let me skip these few slides in the interest of time.
Look here, just a little bit more deeply at our development capabilities. So you see here, pretty incredible numbers in the last twenty, twenty three years. We have developed $47,000,000,000 of real estate. You look through the margins there that, that we’re describing, 29%, I guess, but $13,000,000,000 of value creation. And as I described in that self funding model, the vast majority of that $13,000,000,000 actually crystallized in the transaction where trade in hands with our funds and cash was given back to the mothership to reinvest in, in the following year.
I’m also gonna jump through there. If we just look at the the track record, and I don’t know if you all can see that. Trust me, the bars look good. We’ve got very strong earnings growth, since 2011, low double digit CAGRized earnings growth, similarly on dividend growth as well. I, I should probably make a plug on on the dividend.
I mean, as an investor myself, maybe no surprise, my largest investment is in this company. But I, I love a hard asset company. I love a real business. I love a business that pays a real dividend. We pay out now.
We just increased our dividends. We pay off $4,000,000,000 in dividends every single year or we we will now and going forward. And I think it’s a really great place to be in the kind of environment that we seem to be staring down right now. So just as we talk a little bit more on the state of the market then because maybe perhaps some of you who follow the logistics market know that things have been normalizing from some of the more frenetic activity that we saw in in COVID. So one very good story for us right now is on new construction starts.
So, you see in ’21 and ’22, and and these stories were echoed elsewhere in the supply chain, just that there was a lot of increase in activity and throwing capital into, the business. We saw this in drayage and trucking companies and cargo companies. But similarly, in, in warehousing logistics companies, there were a lot of new development starts, with all the excitement of what, COVID was doing and really the call for more just in case inventory management that our customers were saying they needed as we had those supply chain shocks early in COVID. What it did is it built a very large under construction pipeline, really all around the globe, but in particular around The US, which as things began to normalize wasn’t exactly great. We had a a lot of new supply coming into our markets at a time about eighteen months ago when our customers were starting to retreat from a just in case inventory strategy, quickly started looking back at the bottom line and said, no, no, no.
We’ll go back to just in time. We need to trim some costs where we can. And they abandoned some of the excess space that they had been building into their supply chain and trying to run things very tightly again. That’s okay, but it does mean that there’s this normalization occurring on that side in demand at the same time that all of these new starts, typical warehouse building, can be built in about a year. So if you, cast out where all those light blue lines are about a year, that’s when all the new deliveries are now coming into the market.
That has made pricing more competitive for us. So following years of market rent increases of, we had one year where there was 30% increase in market rents. We had a couple other double digit years, surrounding that in the last five years. We’ve now had last year where rents actually came in about 7%, on average. But as I mentioned earlier, this lease mark to market concept, with the vast well, I shouldn’t say vast majority.
A large component of our portfolio still unrolled from those first wave of market level increases market rent increases. Even though there’s been a decline in market rents just in the last year, it does mean, on average, we are still rolling most of our leases up to market. In fact, in 2024, our average rental increase on lease renewal was 69%, so still very meaningful. I think this year, we think it’s gonna be in the fifties percent. So a lot of uplift despite, despite the adjustment in rents.
I’ll skip that. This is, it’s worth spending a moment on it. Let’s just look at 2024. Market rent spread to in place. So again, this is that lease mark to market concept.
This is saying, you know, until we can roll everything up to market, when we look at rents today, there’s 30% uplift. That represents about $1,400,000,000 which as a REIT, we have to send out in dividends. So as that’s coming, that’s going to be the dividend increases we’ll we’ll look forward to. But then replacement rent spread to market above that number, what’s gonna be the rent that’s required to compel the next development building? That’s another 15%.
So that compounds down to 50%. And, you know, we like to ask investors who are closer to Prologis and Logistics, you know, what they would have thought, the outlook was between now and 02/2019, just pre COVID? When did it seem like the setup for rent growth was better? Because I think this is actually surprising to folks that, actually, the outlook is significantly better, today. So this is a a big left turn, but outside of all of that logistics discussion, we have found ourselves, as a very large developer.
Right, that $45,000,000,000 a year. We have a lot of expertise in energy, which I haven’t yet explained, but we we do a lot of solar energy generation on our roofs. That’s another business line of ours. As that intersects with AI and implications that has had on data centers, we find ourselves that we we’ve always been inclined to hire and better use conversion opportunities of our portfolio often, and we hope, frankly, that our warehouses might one day become, office retail, life science. We’ve seen those kinds of upgrades where, the land use, the land value for those types of uses is much higher than the logistics value.
We now find ourselves in a place where data centers is, very much the right profile for that kind of conversion, and I’m sure many of you are following that sector. It’s very, very hot for us. So we are, we we we’ve invested. We’ve built a big team around a data center conversion business. We’ve got, I guess, about a billion and a half dollars in the ground right now.
We just monetized about $700,000,000 in the fourth quarter in a large data center conversion we executed in Chicago. That that deal had about a 100% margin, between its cost and its ultimate value creation. If, any of you are worried about the long term outlook for data centers, so are we, frankly. We are not converting these, and I’m not being dismissive. Maybe it’s a great business, but it’s not our expertise.
And, there are reasons to be wary of its obsolescence. But what we see here is a near term redevelopment opportunity to convert the assets up to a data center use, but then sell it, dispose of it, and get the capital back. Probably to keep redeveloping in that format, we see about 10 gigawatts of redevelopment opportunity in our portfolio that’ll take between five and ten years to execute on, I imagine. But there will be billions of dollars of value creation in there that we’ll do in a build to suit format, so we don’t execute on these until we have the hyper scale, customer in hand. And then some visibility towards an exit, maybe not fully locked up, but we wanna know we’ll be able to exit on the other side as well.
So we’ve done it in a pretty derisked manner that we’re very, very excited about. This is just a little more information if you go back and read the book on just what some of the power implications are for, for data centers. That’s really the name of the game in this business right now. And then, you know, so just stepping back is where we sit, in the market in terms of valuation. I’ll try to wrap up here.
But, you know, for all of the things that Prologis is offering, there’s just been a little bit too much focus, I guess, in my personal view, around the near term, those market rent to clients that I spoke to, which is really an adjustment, a sensible adjustment off the peak, a lot of focus on Southern California that we could talk about if any of you have questions, but some myopic focus, in my opinion, on, that adjustment period, kinda not really zooming out and appreciating this as a hard asset business, very difficult to replace assets, tremendous cash flow generation already today, and a potential for significantly more, going forward. REITs tend to be focused on in the context of NAB. And And if you don’t know that, that’s just saying, well, I’m gonna pay for this company whatever it costs, whatever I think it’s worth. If I sold all the assets and paid back the debt, what’s left? And, that is kind of an ancient context in our view that doesn’t incorporate any of the things I just spent the last fifteen, twenty minutes talking about, the platform valuation and cash flow generation opportunities out of things like energy, solar, data centers, the strategic capital, fee business, etcetera.
So good. This is my my wrap up. I know I probably went a little bit long here, so I’ll I’ll pause here and see if we wanna any questions.
Jonathan Hughes, Real Estate Analyst, Raymond James: Yeah. Maybe I’ll start with one. Just on you know, you talked about tariff impact, onshore and near shoring. You know, what’s the what’s the house view?
Tim Arna, CFO, Prologis: Yeah. I look. I think, you know, before last night, before even, you know, Canada and Mexico went into effect, and we’ve been talking about tariffs for a long time. I mean, we’ve we’ve been living in a higher tariff environment since, the first administration, and and, you know, Biden and that administration didn’t undo really any of the tariffs that emerged, particularly in China, let’s say. When we step back and zoom out and say, well, what what wound up happening there, really, we saw US manufacturing increase about 2% across that entire period.
So putting a little bit of proof to our belief that it wasn’t really gonna be able to do very much to incent, significant amounts of onshore manufacturing of goods. The the labor arbitrage in many of these places is just gonna be way too much to, to overcome, especially when you appreciate what tariffs are actually applied to, which is not the retail value of the goods. It’s the cost. So So you think about the margins embedded in what we’re talking about, they’re not gonna have that much of an implication. On on the other side, we did see limited growth in manufacturing out of China over that period, but big explosion in growth out of Southeast Asia, Mexico, and then also Europe.
So it’s just going back to this point that we’re seeing things move around, but it actually isn’t doing very much, thus far at least, to spur US manufacturing and hasn’t really done anything on the consumption end. So we are, we are worried about what it means to the macro, and we’re seeing that yesterday and this morning. And, we have to watch how that unfolds. I think for us in the near term, what we watch mostly is decision making of our customers. That can be something that tends to seize up, and and customers try to see what they can do in their flex and and what we call gray space before making you know, these are longer commitments that they’re making in logistics at least five or ten years, a big lease value, lots of employment of a labor force, other improvements into the facility.
So when things are kind of as uncertain as they are right now in policy, you see a slowdown in decision making. That’s, that’s what we feel most. But we think in in the end, demand for our kind of portfolio where it’s located is gonna be strong.
Jonathan Hughes, Real Estate Analyst, Raymond James: Yep. I think we’re about out of time. Okay. Thanks, everyone.
Tim Arna, CFO, Prologis: We
Jonathan Hughes, Real Estate Analyst, Raymond James: appreciate it. Thanks, Tim.
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