The Citi's 2025 Global Property CEO Conference. I'm Nick Joseph here with Craig Mailman with Citi Research. Pleased to have with us Prologis and CEO Hamid Moghadam. 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 live.qa.com and enter code GPC25 to submit any questions. Hamid, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Thank you all. Thanks for having us. I'm Hamid Moghadam, CEO and Chairman for a little while longer. Dan Letter, our incoming CEO and current president. Tim Arndt, our CFO, and Justin Meng, our Head of Investor Relations. So this is my 29th conference here. I think that might be close to a record, and I want to use that privilege to just say a few things about the industry and the company, and then do that quickly and turn it over to you. This industry has changed quite a bit in the last 29 years. We've gone from $40 billion to roughly $1.4 trillion of assets in this sector. Prologis has gone from a company that had just gone public. At that time, it was AMB, with $2 billion of assets, and today it's well over $200 billion of assets.
So quite a bit of change in the industry and quite a bit of change for us as well. But I would say that throughout that period, we focused on really three things, on only three things. One has been an intense focus on customers. Second has been to drive change and innovation in our business. And finally, to build a culture that is the glue that holds everything together. Unfortunately, you can't stick that in a financial model, but it's probably the most important thing. With respect to the future, I am very confident of this team. I do expect to continue to keep a lot of my 60% of my net worth that's invested in this company. And I think we're going to be sitting here in 10 or 20 years and look back at these quaint days of $120 billion market cap and say, "Wasn't it?
Those weren't the good old days, and this is a much more significant company." I'm really that confident in this new management team. So the good news is we're all aligned with you and look forward to your questions.
And let me jump in, actually, answer your question related to the top three reasons to own Prologis. So first of all, it's the organic growth opportunity. Today, there is a 50% delta between in-place rents and replacement cost rents. And we see that number widening given what we see with replacement costs. If you compare to 2019, that number was 20%. So significant upside in our rent roll. Value creation upside. We have a land bank that can support $42 billion worth of development, and that's just our logistics development at this time. At nearly a 40% margin. So a huge amount of value creation upside. Add the data centers on top of that, we have a 10 GW pipeline. Now we have 1.4 GW of secured power. About a third of that is under construction.
We've got 1.6 GW of power in its advanced stages, and that number will grow over the coming quarters. We have a differentiated platform with the right to play in this space because we have the capabilities internally with a very mature energy team, entitlement team, construction team, and we've been building data center capabilities, and then third, Prologis were Category of One. What do we mean by this? We have a leading operating platform with 1.3 billion sq ft of the best located and highest quality logistics buildings across 20 countries. We have an unparalleled development portfolio and capability, as I just mentioned, and we're not going to rest on our laurels. I've been here 21 years.
We have continued to innovate, and we will continue to use this raw material of our 1.3 billion sq ft to provide solutions for our customers, and you will see more of that in the coming years. So with that, why don't we turn it over to questions?
Great. Thanks, guys. And before we start, I just want to acknowledge Hamid, you're handing over the reins, but I really do want to say thank you for your patience with me and helping bring me up to the curve on AMB, then PLD, and the industry. So best of luck, and you're leaving in good hands.
Thank you.
So I went through your deck this morning. I noticed maybe we didn't have the operating update we typically have around the conference. Maybe you guys could just talk about it. It's been about a month and a half since your call, how first quarter activity demand is trending, just given your commentary about kind of green shoots and better activity.
Sure. So we talked in our first quarter call about the surge in activity post-election and actually early on into January. And then what we expected to see was a steady state of leasing, and we're in that steady, more balanced part of what we expected for the first quarter here. We did expect that to continue into the second quarter with an inflection later on in 2025. In the actual data is a very strong leasing pipeline. We have seen a bit more renewal than new than we expected. We'd like to see that new pick, but the build-to-suit pipeline continues to be strong. A lot of the deals that we've talked about in the last several quarters that were alive but hadn't died and they were just kicking the can down the road, we've seen those deals make both in the U.S. and in Europe.
So I feel really good about the build-to-suit pipeline. So what I would say is everything's playing out as we expected and as we talked about in the first quarter call.
And so I know new leasing and gestation periods are what they are these days, and there's talk of tariffs, but it's nothing concerning relative to what you had thought a month or so ago on that and with what you're seeing in the pipeline. No real change there.
No, nothing in our proprietary data.
I know I think we caught up post-quarter end. One of the, I know you guys track internally kind of conversion rates and along with utilization and some of the other metrics you put in there. How has that conversion rate kind of trended? Are you still getting the same backfill with new tenants as you do kind of sign some of those leases?
Conversion rate is certainly tracking about average, and it's tracking better than it was in the first quarter of last year. Last quarter, there was a bit of a surprise to see that conversion rate drop in March, and so we pay very close attention to it, but it's running at a steady pace about average.
I know the policy in the U.S. changed yesterday, but from your conversations with tenants, has that come up more frequently? They just talk about inventory levels they may want to carry or plans of expansions. Anything around there? Are people kind of looking through that because generally everyone has the same uncertainty about what's really going to happen versus what's talked about?
It's really the latter, what you just said there, Craig, because nobody really knows what's going to come of it. I mean, you say new policy. Policy is just a lot of talk right now, right? So we need to see what really plays out. But look at the demand over the last two years, right? First, it was cost of capital increasing, then it was geopolitical concerns, then it was all of this election cycle across 75% of the free world. So then we hit that, we got through that, and we saw that surge in demand. And so at the same time, there's been muted development starts, right? So the supply and completions are coming down. So customers can only kick the can down the road so long.
We talked last year about the over absorption or the pull forward of demand in COVID as groups reconciled their growth trajectories and the resiliency build that they were expecting, and they ended up with more gray space than they thought. Well, these last two and a half years, they've been able to chew through a lot of that gray space. We still hear that term from customers, but it's a much different story today. And we think they're going to have to just make decisions. They can only kick the can down the road so long.
And I know bigger leases were the soft spot in some markets. Clearly, others, it was still good, but generally, smaller lease demand had maintained. Are you guys starting to see some of those bigger requirements come back into the market and absorb some of those bigger spaces that are coming? Could that be a surprise for the market where I know we had some broker conversations after your earnings, and they had a little bit of a different purview than you guys did, but clearly, you guys have a fairly large portfolio that you're looking at day in and day out.
We're definitely seeing larger users come into play. And we've signed some pretty big deals up actually this year already because of it. So we do feel good about that pipeline. But we also do see our major dark green customers continue to focus on their last mile, last touch portfolio, and we're seeing a lot of activity in that space as well.
The essentials business is something that we talk about. There's different pieces of it, but clearly, the sell-through of equipment and racking is a little bit more dependent on some of these large tenants coming back in. I mean, is this the start of a flywheel to some extent where you could start to see the essentials business start to pick up, or is it still a little bit too early to kind of get that piece of the story going?
You know, the thing that gives me the greatest optimism about our operating essentials business is the fact that we thought we would see a lot more demand coming out of the small, medium-sized business. The focus from our dark green customers, these customers that actually have very large procurement networks themselves, are heavily focused on our operating essentials platform, and then on top of that, our energy platform, and it's simply because we are focused every day on what all our customers are looking for, and we've built a very strong business, and we've got this mousetrap that we can deliver faster and at a better price, so really pleased to see what the big customers are coming for in these businesses, and does it create a flywheel? I can absolutely see that flywheel start spinning as those spaces are absorbed.
As a matter of fact, this is a differentiator, and we're actually using this platform to land leases, to land deals. It's something that has picked up a lot of steam, and it's core to our leasing strategy.
When it does start to hit stride, I mean, how big of a contributor can this part of the essentials business that we're talking about, right, actually start to contribute versus where it is today? How much of an uplift that it's harder to model, but it's clearly a value driver and a differentiator for you, just kind of where we are today versus stabilized where we could be?
Let me take a stab at that because I don't have to be here to deliver on it. No, but seriously, I think the operating business, the operating essentials business is probably on the order of $300 million-$400 million in five-ish kind of years. The energy and mobility businesses, with the vast majority of it coming out of the energy business, could be a billion dollars within the next decade. And remember, that's a billion dollars after the cost of capital. So it can be highly accretive to our bottom line because it doesn't take the kind of capital that real estate does to perform. The other thing that it provides, other than the numbers, which I think are actually more important maybe than the numbers, is that it connects us to these really important connections at multiple levels.
And those relationships really change from what is a procurement, what's the rent, and can I save two cents on the rent here, to a much bigger dialogue where the customers are bringing you into their future plans, and you're part of that process. That leads to much higher conversion rates and much deeper conversations with these customers. And I don't think anybody else can do that because, frankly, their business doesn't matter that much to these customers.
And you bring up a point, and I'm going back to the investor day when you said one of the goals is next investor day have more than just real estate people here, right? Because the business is supporting other businesses within the business. And as you guys think about the different pieces of essentials versus just the real estate, you guys have gotten the market to think about the funds business probably in a higher multiple way, probably not as high as you want, but higher than where we were. How should we think about the value of these different businesses within the operating wrapper, right? And the platform value of PLD long-term versus just a general REIT that's owning, operating, and developing?
So it's really interesting. It's probably been the toughest thing that I've tried to do in the last 10 or 15 years. I don't think the market gets it at all because we're all still living in the world of NAV and all that kind of stuff. The fact of the matter is, if you take, we are a big alternative manager of capital. You take that business and apply a multiple that the alternative managers are getting here. By the way, I'll take half that multiple. And it would be a huge uplift in value. But because it's embedded in a real estate company and it's analyzed by mostly real estate investors, it doesn't get the same attention.
The development business, particularly now supercharged with the conversion optionality of higher and better use, data centers, all that within our business, that's not really getting a platform value, whereas these companies, when traded separately, are valued significantly, so the energy business, there have been a couple of trades of energy companies in the renewable space that have happened at very interesting multiples. We're not getting that, so I do think over time, as these businesses get more significant, you're going to see this—you're going to see it either in a much higher growth rate than most other companies that are in the same business as ours, industrial real estate, or you're going to see the other multiples apply to those cash flows, but one of the two has to occur.
Why don't we dive into that point on the data center opportunity? Maybe we can walk through the economics there and the size of the opportunity that you're seeing right now in terms of the uplift relative to industrial use for that land.
Yeah. So I mentioned this before. We have $42 billion worth of development opportunity in just our logistics land bank. So then on top of that with data centers, 10 GW, right? And 10 GW over the next 10 years or so, that is somewhere between $2 million-$10 million per megawatt on the cost side. And there's going to be some mix between powered shell and turnkey that we do there. And from a margin perspective, we've called those margins about one and a half to two X a logistics margin, right? So we expect those margins to be 30%-50% on a run rate basis. There's some bigger margins today, but as the market normalizes and kind of forms around the core takeout, it's probably more rational to think about 30%-50% of the margin.
You guys just sold the data center in Chicago out of USLF, right? And I tried to back into some numbers given what was publicly available, but it looked like you sold for about a little, about $5.1 million a megawatt of critical load off the 32 megawatts. If I look at what your average build is on the utility load, it's about $2.5 million-$3 million, at least of what you've kind of given out. And if I assume like a 70% sell-through rate, that's called $4 billion plus or minus kind of $250,000-ish. Is that the right way to think about it? Because I was getting to close to a 40% margin on that deal, but it's a turnkey deal.
So I'm just, as you guys evolve this business and think about the disclosure to put you on an apples to apples or a way for investors to look at you versus other data center players, are those numbers I'm thinking about in the ballpark?
The margins are much higher than what you explained, and the margin comes from a couple of different sources. One is that we started with an industrial value, building value, which was, and we actually got the power through a process that we went through, so we didn't pay for powered land. We had paid for it. So if you calculate the margin off of that value creation that came from procurement of power, that's a big margin. Then we ordered a lot of the material and components that go into the building early on so we could land a very significant customer and take it to that next level of turnkey. So at the end of the day, think about it as a roughly $30 million industrial building, roughly a $300 million investment, and roughly a $700+ million exit. By the way, we got nothing for it in FFO.
You got a little promote, right? A little bit?
Yeah, but to Hamid's point, that's not our primary earnings metric. We typically look at our growth without the promotes, so that's why we point that out.
But if that were 100% on balance sheet, which it wasn't, it was actually in a fund, if you're releasing all of a sudden $300 million of value creation and you invest that in regular logistics real estate at a 6%-7% development yield, that's $20 million of annual earnings or $0.20 a share, just that one deal. So yes, you don't get it right away in terms of a multiple and that gain, but you do get it in terms of free capital that will drive growth of earnings going forward.
And how are you guys planning, given the tariffs and some of the material costs and equipment costs, right, and some of the lead times that you need and where prices are going? How are you guys managing that to keep that piece of the development cost down on such a capital-intensive build-out, right? And I know you guys went from shell to turnkey on the deal you sold. How often do you want to do that versus just keep it powered shell where maybe the economics are a little bit, you could lock them in a little bit better than having to buy the extra equipment?
A couple of thoughts on that. We've talked about our procurement focus over the last seven, eight years or so. And it really played well for us during COVID when commodity pricing went crazy, and we were able to use our scale to get in front of the big movers in the commodity front. We're doing the same thing as it relates to data centers. While we're the largest logistics owner in the world, we are a real player in the data center world. And it was the differentiator in landing this deal in Elk Grove Village. It's going to be the differentiator with other deals that we have in the works right now. And so we're going to leverage that procurement network. And right now, we have hundreds of millions of dollars of equipment that we've already tied up. And again, that's a differentiator for Prologis.
We can actually come out there and write these checks and secure that equipment that's going to lead to those deals. We do that while taking the temperature of these users and the likelihood of landing a deal. So I can see that number actually moving up before it moves down. What was the second part of your question?
Just how much of the build-out do you want to keep powered shell versus?
We have not done much spec on the powered shell basis. We've done a couple. Given the current demand, we know where these customers want to be, and we'll focus on our risk exposure around the powered shell side and then right-size that risk profile as it relates to turning that into turnkey and otherwise. But we see most of this as a build-to-suit for the near future, so turnkey.
Yeah. And the components we're buying are fairly standard. I mean, tangible, and you can apply them. We're, in effect, buying a space in the line, and we can apply that component to a number of different projects. And we don't buy 100% of all of our components. We buy a lower percentage than that. So we can always use it or sell it to somebody else. But the advantage it gives us is not just cost. It's time to deliver. That's the key thing because the wait line for these things are long. And remember, we're competing with a lot of people that have finite life capital vehicles. Tough to do that. You need to have infinite life, permanent capital in order to be able to do that very effectively.
Are there any questions in the room? Okay. Maybe just going to industrial development for a second. Dan, I think you said a 50% replacement cost delta now for new supply. Clearly, your basis allows you to still do some of this, but what are you seeing competitors do? There's still starts, right? But in what markets does it make the most sense for you guys to start on a speculative basis? Build-to-suit shell kind of do, but globally, where are you seeing the best appetite for spec?
It's very, it'd be a different answer today than it would be in 30 days, honestly, and you look at our portfolio, our land portfolio that can build out $42 billion worth of logistics is in 60 markets, and we have focused, and we continue to focus on readying that land, so $8 billion of that, we could literally start tomorrow. It's fully permitted, ready to go. We flip the switch, so we can pay very close attention to the market fundamentals and go spec. It's all ready to go, right now, you're seeing the stronger markets like the Southeast in the United States. You're seeing some building going on there. You'll also see some surprises in some markets, but what ends up happening is entitlements have an expiration date, and so people are forced to start.
This year, so far, we're seeing starts down about 10% from what our expectation was through the first half of the year. So we'll see where that plays out. But each one of those has its own story. And we've built the portfolio and curated this land bank so we can actually leverage and get out in front of a dearth of supply in any sort of market. But hard to pinpoint any given day where there's any specific volume.
But I'll pinpoint something every day for you. We lease a million sq ft every day. Every business day, we lease a million sq ft. And I bet you that's 3x the volume of leasing that the rest of the industrial market does in aggregate. So even if you're not terribly bright, you see patterns when you're doing that much leasing and you're in constant dialogue with the customers. And your business volume matters to them. So that's the advantage.
And you guys always talk about you give some level of start guidance with guidance, but it's, for all intents and purposes, somewhat of a placeholder, right? Because you're not beholden to it. As you guys are looking out now, how do you wrestle with you are the biggest owner, so if you hold back on new supply that actually helps you and helps peers and probably doesn't impact your guidance that much because it doesn't deliver for another year or so and you guys have a big pipeline of future deliveries? So as you think about the next 12 months, how has that hurdle of go, no-go changed? Because there is a vested interest in keeping supply down, right, and keeping starts down so that tenants know there's nothing coming.
So Craig, I have spent the last 40 years trying to talk you guys out of asking for development guidance because I've said it can be between $0 and $25 billion, and we've exceeded it on both ends in a given year. We can make our guidance no matter what. We can make whatever number you want. But the question is, how much of this stuff can we do prudently and earn a good return on it? We're much more focused on that than meeting a guidance that we reluctantly gave at the beginning of the year. So it's the part of our, we take guidance very seriously, but the development and deployment guidance, we don't take that seriously. We'll take our best shot, but we don't feel like we need to live to that to prove any point because you end up doing bad things when you're volume-driven.
That's the way we think about it. And so far, it's served us very well.
If we move to acquisitions, the industrial market's been fairly liquid. You guys have been a seller. Others, Blackstone's been a seller, right? EQT is now selling a large portfolio. As you guys look with the development that you have, what's the interest level in buying stabilized assets from end-of-life vehicles at maybe market pricing? I know there could be a strategic reason sometime. How do you balance the strategic reason to get bigger in places you like where you really think that IRR long-term, you're going to make money versus you guys don't need to get bigger for size sake, right, so how do you look at that in the U.S. versus your international markets, and where do you see the best opportunities today?
Craig, what I would say is we look at every deal on a one-off basis. We analyze the deal by its merits. Our teams are out there, hundreds of people in these key markets around the globe trying to turn over every stone. And they're not incentivized to just grow or place dollars. It's a dangerous way to grow, and that's where we've been able to maintain our discipline. We focus heavily on replacement cost when we're looking at acquisitions. We talked about last year, our acquisition volume was $2.5 billion or so, and we bought that 21% below replacement cost. And so as we look at each of those deals, and you'll see us buy in any of our markets, we're going to just look at the merits of the deal on its own.
Yeah. The other thing is each one of those locations has a different cost of capital, and we're very focused on the spread over the cost of capital. And I would say in the U.S. today, our hurdles would be around 8% unleveraged IRR. And I would say the market is lower than that today. We see people pricing more aggressively than we are. And so there are always exceptions case by case. But generally speaking, my feeling is that in the U.S., people are pricing assets in the low to mid-sevens IRRs.
I had a question come in. I guess just going back to leasing, but what is demand looking like year to date in Southern California? Demand in Southern California is, as expected, it continues to be muted. We continue to see our customers making their way through this gray space. Southern California had the biggest impact of overabsorption during the COVID years. So we're seeing that continue to be chewed through, but we've expected that to be the case, and we see Southern California recovering a quarter or so later than the overall market.
I think Southern California tripled rents during COVID, and it gave back a third, so still double rents, and I think a year from now, certainly, we will be talking about Southern California as one of the better markets to invest in.
On the supply side in Southern California, with AB98 that was signed into legislation at the end of last year, it's only making it harder to build in one of the hardest markets on the planet to build.
Do you think anything related to the fires? Do you think that stays residential on zoning changes and kind of quicker regulation to get things permitted? Do you think that ever migrates to commercial, or is California glimmers of hope, but long-term kind of same trajectory of regulations?
I think the reconstruction that needs to take place in Southern California is going to generate a lot of economic activity that will be on top of the normal economic activity. There will be a lag because they're still working through the entitlements and how they're going to streamline it, but remember, there's the Super Bowl, the Olympics, and the World Cup happening in L.A., and L.A. is going to want to show its best face to the world, so I think it's a really unfortunate situation. A lot of people obviously have suffered, but economically, we've seen after a lot of these calamities, actually, there's a surge with a lag of economic activity that will drive absorption of industrial space.
Certainly, we weren't counting on that when we issued our guidance and all that kind of stuff and hate to make our business depend on those calamities, but that's what's going to happen.
From a strategic capital standpoint, how are the queues looking today versus six months ago?
I could take that. They're looking better, Craig, I would say. The queue is deeper in terms of number of names and how many folks are in diligence right now. I think what's more interesting to us right now is some of the ticket sizes are growing. So that's something we're watching. It might make the way this year's fundraising land with between quarters a little more lumpy, but we're looking for an upgrade on the overall year and encouraged by the bigger bite sizes.
Maybe sort of an off-the-beaten-path question, but you guys have the venture capital arm. There's been a lot of talk about robotics, automation. Any interesting investments you guys have made there that can help solve the labor issues that some of your tenants are facing?
We invested in a company in Japan called Timee, and they went public and they were originally set up during COVID for the restaurant business in Japan of finding workers to work in restaurants and they pivoted to warehouse space, and the company went public about six months ago and I think our.
Last summer, yeah.
A couple of million-dollar investment translated into like 40 or something. It was a very good exit, and that is directly focused on the labor issue that you're talking about. We have a couple of other investments in the labor area. It's one of the verticals we're very interested in in the U.S., and we'll see what happens. But labor is a big opportunity on the technology side.
Several on the automation side as well related to labor.
Perfect. Do you want to go rapid fire?
Sure.
So we have the two rapid-fire questions to end the session. What will same-store NOI growth be for the industrial sector overall next year in 2026?
5%-6% cash.
Then will the industrial sector have more, fewer, or the same number of public companies a year from now?
Same.
Great. Thank you very much.