Prologis Inc (PLD) — Q4 2024 Earnings Call Transcript

Thanks, Jamali, and good morning, everyone. Welcome to our fourth quarter 2024 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations. I'd like to state that this call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K and other SEC filings. Additionally, our fourth quarter earnings release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg G, we have provided a reconciliation to those measures. I'd like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions, and guidance; Hamid Moghadam, our CEO; Dan Letter, President; and Chris Caton, Managing Director are also with us today. With that, I'll hand the call over to Tim.

Thanks, Justin. Good morning, everybody and thank you for joining our call. I'd like to begin by recognizing the devastating wildfires still affecting Los Angeles. We operate a large portfolio there, but more importantly, we have colleagues, customers, and their communities struggling with the aftermath. It's too early to predict the full ramifications, but we'll continue to support the response and stay connected with local and state leaders as well as service organizations as the region works to recover. We have no doubt that a vibrant and dynamic Los Angeles will emerge from this crisis even stronger. In our business, the bottoming process across our markets continues to progress. Leasing in our portfolio accelerated following the U.S. election, and the pipeline has started the year at healthy levels. During the quarter, we signed more than 60 million square feet of leases, a company record, and saw interest diversify across customer profile, size requirements and markets. Looking ahead, we believe market vacancy is topping out and rents will inflect later this year. Turning to our results. Core FFO, excluding net promote income was $1.42 per share and including net promotes was $1.50 per share. Our full-year results ended at the top end of our guidance range, and in the end represent 8.4% growth over 2023, putting us in the 86th percentile of all REITs. Average occupancy was 95.8% for the quarter, 96.3% for the year. Net effective rent change during the quarter was 66% and on a full-year basis was 69%, activity which added over $340 million in annualized NOI. Our net effective lease mark-to-market finished the year at 30% and represents a further $1.4 billion of incremental NOI. And finally, net effective and cash same-store growth during the quarter were 6.6% and 6.7% respectively. In terms of capital recycling, we had another active quarter. Importantly, we contributed $2 billion of assets to our strategic capital ventures, bringing the full-year total to over $3.3 billion. While capital flows in 2024 remain challenging, we did raise over $1.7 billion across the platform, driving the growth in third-party AUM by over 7%. We disposed of over $900 million of assets in the quarter and acquired approximately $450 million. And stepping back, over the full-year, we disposed of over $2.1 billion and reinvested into a similar $2.3 billion of acquisitions at a positive IRR spread of 170 basis points, demonstrating our ability to self-fund and earn a return regardless of the yield environment. Included in our disposition activity for the quarter was the sale of our Elk Grove data center in Chicago. Elk Grove was a logistics asset that we converted to a powered shell before securing a build-to-suit turnkey transaction with a hyperscaler last fall. We simultaneously identified a buyer and closed in the fourth quarter at very attractive economics. Because the property was owned by USLF for our structuring, procurement, leasing and monetization efforts, Prologis earned a value creation fee of $112 million, which was not included in our prior guidance due to the uncertainty and the timing of the transaction. Elk Grove is a great showcase of our data center development capabilities, which are more comprehensive than most. Today, we have 1.4 gigawatts of secured power and 1.6 gigawatts in advanced stages of procurement. Over the next 10 years, we see 10 gigawatts of development potential across our portfolio. As a platform, we have the team, customer relationships, development and energy expertise, advanced procurement capabilities and the capital required to create significant value for our shareholders. Turning to market conditions. As mentioned, quantitative measures of the market such as vacancy and changes in market rent met our expectations. More importantly, indicators in our pipeline and dialogue with customers have us encouraged that conditions are set for a recovery in net absorption, leading to a bottoming of global rents. It's worth highlighting that our non-U.S. portfolio fared better in rent growth over 2024, particularly in places like Japan, the U.K., Southern Europe, and Latin America, which all grew over the year. Customer engagement is improving and we saw a notable increase in activity amongst our larger global customers who often lead in the recovery of demand as we've seen in past cycles. The improvement in decision-making is reflected in our proprietary metrics where proposals increased earlier in the year, lingered for a period of time and then began converting more meaningfully after the election. That leasing pattern translated to elevated gestation also seen in our metrics. Our '25 forecast for net absorption calls for approximately 20% improvement over 2024, gradually building over the year. We also know that completions will decline significantly, contributing to a supply forecast that is approximately 35% below '24. As such, we expect a decline in vacancy over the year, which will pave the way for rent growth. Longer term, we continue to see the path for uplift from market rents to replacement cost rents, a dynamic that will build upon our already significant lease mark-to-market. Today, we see replacement costs as 50% higher than in-place rents. The capital markets were active with fourth quarter transaction volumes that put the year in total back to pre-COVID levels. Unlevered IRRs have compressed to the mid-7% range, and valuations as reported in our third-party appraisals had the globe marginally up this quarter. Capital raising in our open-end vehicles was more muted in the fourth quarter as investors paused to take in changes in the yield environment, but we remain confident in our expectation for growing capital raises in 2025 as the pipeline is solid and conversations are active. In terms of guidance, which I'll review at our share, we are forecasting average occupancy to range between 94.5% and 95.5%, which contemplates a dip in occupancy over the next one to two quarters, some of which is seasonal before rebuilding closer to 96% by the end of the year. Net effective same-store growth is forecasted to be in a range of 3.5% to 4.5% and cash in the range of 4% to 5%, each driven by still significant rent change. Our G&A forecast is for $440 million to $460 million and our strategic capital revenue forecast calls for $560 million to $580 million. As for deployment, we are forecasting development starts to range between $2.25 billion and $2.75 billion. We will continue to be selective in our starts and clearly have a lot of capacity to grow this number as conditions, rents and returns warrant. As a reminder, data center starts are excluded from this guidance, given their lumpiness. That said, we do expect new projects to begin in 2025, likely in a range of 200 to 400 megawatts. Acquisitions will range between $750 million and $1.25 billion and our combined contribution and disposition activity will range between $2.5 billion and $3.5 billion. Our development portfolio now stands at $4.7 billion with estimated value creation of $1.1 billion, $450 million to $600 million of which we expect to realize this year. Finally, 2025 will be an important year for our energy business where our forecast is to hit our 1-gigawatt goal for solar generation and storage by year-end. In total, we are establishing our initial GAAP earnings guidance in a range of $3.45 to $3.70 per share. Core FFO, including net promote expense will range between $5.65 and $5.81 per share, while core FFO, excluding net promote expense will range between $5.70 and $5.86 per share. In closing, we navigated a challenging year in terms of an operating environment, clearly unwinding from the overbuilding of the COVID era. Our ability to generate over 8% growth in such an environment is a testament to the resiliency and breadth of our company. We're pleased with the increase in activity and improvement in sentiment that we've seen so far in the last two months. And working through great space amid the favorable supply backdrop will further establish the foundation to build occupancy, grow rents, and increase values, unlocking the full earnings potential in our core business. And finally, we're very excited with what the future holds for our data center and energy initiatives. With that, I'll turn the call over to the operator for your questions.

Thank you. Good morning everyone. Can we flesh out the 2025 guidance a little further, please? And maybe you can touch on items like lease spreads, bad debt that you're assuming. And on the occupancy front, the 95%, which is a little bit lower, I'm curious how much of that is same-store versus, let's say development leasing or development projects coming into the pipeline that might not be leased up for some time of period. Thank you.

Hey Ki Bin, it's Tim. So on rent spreads, we're going to see them in the 50% range this year, the five handle over the course of this year, still quite elevated from that lease mark-to-market, even with market rent growth a bit slower in the last several quarters. Bad debt, we normally are expecting something on the order of 20 basis points. Our history has been a little bit better than that. Our forecast is allowing for between 20 and 30 in this coming year as we enter the year with a few known tenants that we're watching. But we'll see that normalize hopefully by the end of next year. And then in terms of occupancy, the two pools are so large, the average occupancy and ending occupancy, that we're expecting broadly for the company are not very different than what we'll see in the same-store pool.

Thank you, Ki Bin. Operator, next question?

Good afternoon everyone. Hey Tim, you guys made some positive comments around leasing. But when I look at the space utilization chart, it was a bit surprising that it slipped from the last quarter. Maybe reconcile the trends you're seeing there with some of the comments you're talking positivity around leasing inflection, et cetera. Thanks.

Hey Samir, it's Chris Caton. I'm going to take it. Thanks for the question. Good to hear from you. So at the end of the day, we think there's some good news in this data and let me unpack that for you. As you look at the course of that material data over the year, utilization was largely ranged down in the low 84% range and we do think a more typical level is 85% or higher. Now recall, over the course of 2024 and in particular in December, look, consumption growth and holiday sales were unexpectedly healthy, and that pulled goods out of the supply chain. And it led to this dip in utilization that is not really representative of the true trend. Customers instead are telling us that their utilization is rising, and we're starting to hear reports of inventory building taking shape in 2025.

Thank you, Samir. Operator, next question?

Good morning. Thanks for taking the question. So just on market rent growth, do you mind, A, just giving us what the actual realized market rent growth was across sort of the U.S. versus other regions, maybe even just coastal, non-coastal? And in the same view, if you can give your updated forecast for '25 or just the 12-month rolling number you gave. Thanks.

Hey Vikram, Chris Caton. Thank you for the question. So we had rents decline roughly 2% in the quarter. And yes, there was a differential between coastal and non-coastal although it had narrowed in the fourth quarter. As it relates to 2025, Tim described an outlook. Look, most markets are stable but we expect modest further decline from here in a handful of soft submarkets. Later this year, we expect an inflection in positive growth to emerge, excuse me. Now how that comes together for a view on 2025, there are scenarios where rents are flat, down, or up. And look, calling an inflection point within a single 12-month window is difficult and we do not want to offer that sort of sense of false precision.

This is Dan, let me pile in on that. One thing to keep in mind is it's a point I made on the call last quarter is 90% of our leases actually roll beyond the next 12 months. So to his point on whether rents fluctuate up or down two points throughout the year, it's not going to impact the long-term earnings for this company or the value of the business. And as Tim mentioned in the script, replacement cost rents are actually 15% higher than market rents, and that's 50% higher than in-place rents. And it's the gap between the market rents and replacement cost rents that are really going to be the ultimate driver of rent growth into the future.

Thank you, Vikram. Operator, next question?

Hey, just going back to the dev starts, obviously picked up this year versus last year. I guess I'm curious if you're thinking about commentary of leasing accelerating, positive absorption. What do you need to see for us to see that number start to ramp back up to the $4 million to $5 million zip code? And do you think you could see it this year?

Thank you, Ron. Last year, we intentionally slowed down our starts and maintained a disciplined approach to our spec program. We also experienced several significant build-to-suit projects that are now scheduled for 2025. Currently, we are observing improvements in market conditions, which leads us to anticipate a decrease in completions. In fact, starts have also fallen 70% from their peak. The market is moving in a positive direction, and we are waiting for rent and returns to improve. It's important to note that we currently have $5 billion in development and 30 million square feet in progress. We also possess a substantial land portfolio valued at $41.5 billion, encompassing hundreds of sites worldwide. We have been investing in infrastructure and site work to minimize build time and be ready to proceed when the timing is optimal.

Thank you, Ron. Operator, next question?

Good afternoon. Thank you for addressing my question. In your prepared remarks, you mentioned that leasing in your portfolio accelerated after the U.S. election and that the pipeline has entered the year at strong levels. Can you elaborate on the extent of that improvement? From your discussions with tenants, what factors are contributing to this enhancement? Is it due to increased certainty, a greater willingness to spend, or are deals that were previously stalled now being approved? Any insights you can provide would be appreciated. Thank you.

Yes, Michael, I'll begin and maybe Tim or Chris will add to it. Last quarter showcased two distinct markets. In the initial part of the quarter, particularly the first five to six weeks, it was quite quiet, as customers were waiting to see the outcome of the election. This followed several quarters of delayed decision-making due to concerns over capital costs and geopolitical issues. However, after the election, we experienced a substantial boost over the next ten weeks, resulting in solid decision-making and the unlocking of previously stalled deals. We're observing resilience across e-commerce, general goods, electronics, and food and beverage sectors, indicating broad-based activity and positive feedback from customers. Some customers are still navigating uncertain areas and concentrating on cost containment. Nonetheless, third-party logistics companies set a new record last quarter, leasing 25 million square feet, bringing their total for the second half of the year to nearly 50 million square feet. This reflects the dual nature of the markets and significant leasing activity from various customer segments. Chris, over to you.

Yes. Just in terms of the specific quantification, Tim already discussed record lease signings. And in terms of pipeline, the pipeline is up 17% January-to-January, specific response to your question.

Yes. The only thing I would add is that actually the end of the fourth quarter and the beginning of the first quarter are usually slow times. So I think the bump was even more important or different than history.

Thank you, Michael. Operator, next question?

Hey, good afternoon guys. Just on the occupancy piece, just a few follow-ups. Tim, maybe you mentioned a couple of tenants that you're monitoring for bad debt and then you also mentioned seasonality. Could you frame up, within that range of 100 basis points at 94.5% to 95.5%, how much of that is sort of seasonality driven versus how much of it is potential bad debt that may not materialize? And then that was helpful on the pipeline update. But I'm just kind of curious here also how you guys are managing the portfolio with an expected market rent inflection potentially by the end of the year. Are you guys prioritizing occupancy over rate at this point to kind of run the portfolio? Or are you holding back at all kind of holding on price? So just kind of curious how much toggle there is in that occupancy guide on kind of what you know versus how you're managing the portfolio.

Hey Craig, let me start by unpacking it this way. As we look at our outperformance to market on occupancy historically, and I'm talking maybe 10, 15 years now, we have a history of outperforming the market maybe 100, 150 basis points. And I would just put a side note on that, that over that period of time, that portfolio has been improving greatly and we expect that outperformance will grow. And in fact, in the recent quarters, it has or even years now, we've seen that outperformance level nearly double. If you put the elements of our forecast together with not only for our own portfolio but also what we see in the market, we think we're actually going to see this level of outperformance that we have today, which sits in the high 200 basis points, probably where we end the year. What we do see is that in our own portfolio, just again circumstances to particular leases, that our average will be a little bit lower. So my point here is you can almost ascribe that difference that you observe in average occupancy to those rolling leases that are going to take a little bit of time to backfill, but we do think we'll rebuild that overall outperformance level by the end of the year. And then in terms of managing for rent growth or occupancy, as you can imagine, it's not just a market or submarket conversations even down to the lease level, given our revenue management capabilities. And we have a lot of markets and submarkets at different stages of recovery. So those are really one-off decisions.

Yes. I would like to add that credit loss has averaged under 20 basis points over the business cycle. The peak occurred during the global financial crisis, reaching nearly 100 basis points. Even at the start of COVID, when there was widespread panic, it climbed to 50 or 60 basis points before quickly decreasing again. Therefore, credit loss has not significantly contributed to the changes we've observed. Additionally, we monitor a statistic regarding the value generated from credit loss. Due to the substantial mark-to-market, if we lease space that experiences credit loss within the next 15 months, we actually come out ahead financially. This means that if the space remains vacant for less than 15 months, we profit from it despite the credit loss. While this affects short-term earnings, it serves as a long-term value driver.

Thank you, Craig. Operator, next question?

Hi, everyone. Maybe for a while now, it has seemed like the new leasing was a tougher part of the business but that renewals were doing well, so high retention, maybe slightly less price sensitivity. How would you describe that renewal business now? Is there anything changing in the trends that you've noticed and when leases come up for renewal or tenants staying, and if not, why not?

Hey Caitlin, it is Chris Caton. Thanks for the question. When we look at our pipeline, we still have many of our customers interested in renewing and that trend continues. But there are more new requirements coming to the market, customers looking to grow. And so we also have seen an expansion in our new leasing pipeline. So both things can happen at once. They are not mutually exclusive.

Hey Caitlin, customers move because they may need more space or they may need less space, or they may need space in a different location. And oftentimes, that actually occurs within our portfolio. But when you're sort of 95% leased, the options are limited in the portfolio. So sometimes we lose them for that reason. But the preference of most customers in a stable environment is to renew. It's just less costly to do that.

Thank you, Caitlin. Operator, next question?

Thanks. Just turning back to the guidance. I guess, Tim, I was wondering if there's any way you could quantify a little bit more some of the impact on what feels like is going to be lower development NOI from stabilization this year versus last year. I mean, you do have the stabilizations and guidance at $2.5 billion. Last year was over $4 billion. So I imagine there's some NOI drag there. And then also if there's also a capitalized interest issue to think about? And I guess with the starts also having now picked up and planning for this year, is 2025 sort of at a worse point in terms of that year-over-year delta on how like development might be weighing on FFO growth this year? Thanks.

Yes. Thanks, Nick. Look, you've got the right elements, of course. And the way I might even examine this question, if we look at same-store in '24 compared to bottom line earnings and then do the same embedded in our guidance for '25, pardon me, that delta between the top line and the bottom line is apparent. It's due to the factors you described. I would throw in that interest rates as well, even though nominally, when we move from 3.0% to 3.2% interest, doesn't sound like much, but on a percentage basis, that's a driver. The development start volumes being a little bit low to our capacity is starting to be seen as well. What I feel good about is that all the things we're describing here are normalizing, in some cases, below trend in others but are going to reset themselves to a new foundation for growth from here, which we're very confident is going to be back up in the levels that we've seen this company historically provide.

Thank you, Nick. Operator, next question?

Hi, good morning. Can you discuss rent trends at the market level in a little more detail? Specifically, could you provide how much rents increased during 2024 in your better markets and how much they fell in 2024 in your weaker markets?

Hey, Vince, Chris Caton here. I want to emphasize that we're a large global international business, so I won't go into market-by-market details. However, it's important to note that international markets have outperformed domestic ones. Tim mentioned specific regions in his script, but to highlight a few, Japan, Europe, and parts of Latin America showed clear outperformance. In the U.S., we discussed the difference between Southern California and the rest of the business. In Southern California, rents dropped 25% on a net basis, indicating a significant adjustment in rates. In comparison, outside of Southern California, rents only fell modestly over the year.

Yes. And the best performing markets would be in single-digits up, and the worst performing markets other than SoCal would be in single-digits down. And just while we're on the subject of SoCal, there are two issues that I think the market is not focused on. One is this whole discussion about immigration and its impact on labor supply and the impact of that on construction costs; and secondly, the pressure that the rebuilding efforts are going to put on material supplies and labor. I think all of those things are going to drive replacement costs significantly higher. And so that spread that you've heard us talk about, the 50%, I would bet that, that spread is going to widen significantly.

Thank you, Vince. Operator, next question?

Great. Thanks. Can you give an update on your overall mark-to-market throughout the portfolio? And secondly, I guess, how should we think about the cadence of same-store NOI throughout 2025? You're coming off a fourth quarter at 6.7% cash same-store NOI. So should we expect it to gradually come down throughout '25 and end the year somewhere below that 4.5% cash midpoint? Or is there more nuance and seasonality in the forecast, given that you mentioned, I think that occupancy would build back up towards the end of the year? Any commentary there would be helpful.

Hey, Blaine, it's Tim. Regarding the lease mark-to-market, I mentioned that it's about 30% at the end of 2024. We don't provide significant geographic details, but you can assume it generally represents the United States, especially considering the state of rents in areas like Southern California. I'll let you interpret that further. As for the cadence of same-store growth, I believe rent changes will remain quite stable over the quarters, largely depending on occupancy trends. In the upcoming quarters, we anticipate some decline in occupancy, although I hope to exceed that expectation. This would likely lead to lower same-store performance in the first half of the year, followed by growth in the second half.

Thank you, Blaine. Operator, next question?

Thanks and good afternoon, everybody. Tim, if memory serves me, you previously talked about, I think, $7 billion to $8 billion of data center spend over the next five years. I think you mentioned 10 gigawatts of data center opportunities in your prepared remarks, which is likely above the top end of that previous range. Are we thinking of that correctly? And if so, what are your thoughts on data center spend as we look out over the next three to five years for Prologis?

Hey, Tom, this is Dan. I'll take that one. So yes, you're thinking about this correctly. You should think about 10 gigawatts over the next 10 years. We've built internal capabilities over the last one year, 1.5 years, and we've been just getting deeper on our pipeline and have a lot more confidence in the numbers that you've heard. Like we said, we've got 1.4 gigawatts secured power. We've got 1.6 gigawatts in the advanced stages of procurement. We've got another 1.5 gigawatts of applications that are right behind that. But all in, it's 10 gigawatts over the next 10 years. And that doesn't even touch upon the universe of opportunities. This is coming from a portfolio of 6,000 buildings and 15,000 acres of land that we own or control. So the universe of opportunities is much greater than that. Tim?

Yes, I'll just come back to maybe what was also underneath your question there on the sheer amount of spend. And you see this quarter, Elk Grove, as I mentioned, a great example of the playbook that we have at the moment is to recycle and monetize back out of these assets. That may take a different form over time, but the point is we will free up capital. We have an internal risk budget set up for this business that is sufficient for the team to execute.

Yes. One other thing, it's always not easy to translate megawatts into dollars. For example, Elk Grove started out being a powered shell and ended up being a turnkey. So that will maybe increase the capital spend by a factor or two. So we're more comfortable projecting megawatts than dollars, but regardless, we can handle it.

Thank you, Tom. Operator, next question?

Hey, good afternoon. Maybe digging in a little bit more into the development starts and kind of maybe geographic mix and build-to-suit sort of mix of the two. I know you guys have tilted a little bit more ex U.S. on the development starts here in '24, but as '25, are you expecting to start more in the U.S. or what's the mix shake-out there? And then you noticed the pickup in the build-to-suit side. So is that still going to be a strong proponent of that start this year?

Yes. Nick, this is Dan. Last year was a slow year for development starts in the U.S. I do see that picking up. Hard for us to give you a mix at this point, because as I said in some remarks earlier, we have so many opportunities, literally hundreds of opportunities. And most of this land is ready to go. So we're going to pay attention on a deal-by-deal basis, market-by-market and make decisions that way. We do see build-to-suits improving year-over-year as well. Our long-term average on build-to-suits is about 40% of the overall development starts. Hoping to hit that number. We definitely had some big build-to-suits that moved from '24 to '25 so we're hopeful that those make it.

Thank you, Nick. Operator, next question?

Yes, hi. What was the solar FFO contribution in '24? And what are you assuming for '25, given the growth that you're seeing in that business?

Hey, Mike, in '25, across the Essentials businesses, I'll provide that in a little detail. We see probably $0.10 to $0.14 of overall FFO contribution from the three businesses, solar. It's pretty limited in mobility right now, to be honest. It's predominantly coming from solar and the operating essentials business. Across 2024, that number was $0.07 to $0.08.

Thank you, Mike. Operator, next question?

Great. Thank you. I know Hamid touched a bit on some of the executive orders or discussions from yesterday's transition. I wanted to just follow-up on the latest discussion around tariffs, and if there's anything else to add to some of the executive orders that were executed yesterday? Thank you.

Hey, Jeff, Chris Caton here. So look, on tariffs, we follow the news just like you do, and it's really too early to speculate to how these policies will land and be implemented and the customer response. Couple of considerations. Number one is, look, our business revolves around consumption. 90% or more of the customer base is really serving consumers so that's really the critical area to track. Now as it relates to trade, we do think the historical precedent is instructive, and we stand by the views that we shared on our last call as well as the white paper we published in November. A couple of highlights there. Over the last eight years, trade has grown 30% on an inflation-adjusted basis, and supply chains adapted to changes in trade policy. So trade with China is effectively flat over those eight years, whereas Asia ex China is up nearly 75%. Mexico is up 40%. At the same time, over the same time period, U.S. domestic production rose only 3%. And really, the U.S. just doesn't have the labor to produce more goods here and so tariffs are inflationary. So trade policy earlier was crafted to accomplish industrial goals, while minimizing the risk to consumers, and the administration will be guided by having a strong economy and tariffs are counter to that.

Yes. I would add just one comment. I think that Mexico and let's drag Canada into that because it's usually used in the same sentence, it's primarily an immigration discussion. Because at the end of the day, the combination of deporting people and wanting to put tariffs on, I don't know where the labor is going to come from, it's either going to come from China Plus One or it's going to come from Mexico. And my bet is that it's going to come from Mexico but under new immigration controls and policies. I think with respect to China, container doesn't care whether it's coming from Vietnam or China. It's going to be pretty much the same dynamic. And it's driven by geopolitics. It's not really driven by economics. At the end of the day, I think the new administration and the old administration were smart enough to understand that tariffs are highly inflationary. Forget about the narrative. But at the end of the day, given the limitations on labor, tariffs are going to be extremely inflationary. We're going to have them, for sure, we're going to have more of them. But I think they're going to be more moderated once the other political objectives are achieved.

Thank you, Jeff. Operator, next question?

Thank you for taking my question. That was very helpful information on the tariffs and how we should consider them. Could you share what discussions you're having with tenants regarding their views on tariffs? Are they bringing inventory into the U.S. more quickly than they normally would, or are they taking a more cautious approach?

I think some of the de minimis people have pulled more trade into the U.S. in anticipation of some of this. But that is only shifting volumes maybe a quarter or two. It's not going to be able to affect the long term. So there's going to be some noise in the numbers that you'll see in the fourth quarter and the first quarter of next year. But I think that the fundamentals are going to take over starting in the second quarter.

Thank you, Brendan. Operator, next question?

Yes, thanks. I wanted to touch on the promote income recognized during this quarter. Is there something different with the data center sale that allowed PLD to earn this promote? And correct me if I'm wrong, but I thought the USLF didn't have a promote opportunity until the second quarter of 2026. So I guess, did this pull this forward?

Hey, Mike, well, all of our funds beyond the three year recurring promote events or sometimes incentive fees can be earned at the end of the life of a closed-end funds. Our vehicles typically provide for promote opportunity upon completion of some kind of successful development. Now in funds like USLF or PELP, which are typically operating vehicles, you don't see very much of that. But here, we had a large development, redevelopment opportunity in Elk Grove that we frankly, I have to think of it this way, Prologis is building a business here. We're bearing all of the G&A and cost of this data center business that our funds are going to enjoy the benefits of. So we are structuring and have structured ways to get compensated for those activities, and that's what's reflected in this quarter.

Yes. It's not just development. Remember, one of the big advantages that we have in this business over other people is that we can actually procure stuff ahead of time. And that oftentimes puts us in a position to be able to convert on leasing opportunities, because the time line for delivery becomes compressed. And obviously, to the extent we do that with our balance sheet, there's some value creation that comes out of that as well. So and we can do that because we have multiple data center opportunities. And as long as you're smart about procuring the right stuff that's fairly fungible, you can move it around. And all of that is done very transparently and working with the independent advisory councils of these funds. So yes, we have other opportunities to earn fees based on value we contribute.

Thank you, Mike. Operator, next question?

Thank you. On data centers, given the amount of capital and capacity that you've highlighted today, any updated thoughts on establishing a data center fund or some kind of structure with recurring income? And then specific to this year, it looks like you have $100 million of data center developments that are your partners' share in your current pipeline. Should we assume some margin on this will be recognized this year as a promote income?

Let me address the first part of that question, and then I’ll hand it over to Tim for the second part. We have not yet decided on the long-term capitalization strategy for our data center business. Currently, we view ourselves as developers who will monetize and sell these assets once completed. The capital generated will be used to grow our core logistics business. That is our current strategy. We might consider broadening this approach to include a fund management strategy, whether through a dedicated fund or by expanding the investment mandate of existing open-end funds, after discussing it with our investors. This could potentially allow for the inclusion of some data centers within certain limits in those funds. However, this decision is not finalized yet as we are currently focused on it as a funding mechanism for our logistics development. We may change our approach in the future. One thing we will not do is hold a 100% interest in data centers on our balance sheet, as the capital requirements for that would be significant.

And John, it's Tim. Maybe I'll grab you off-line to see what you're looking at to believe some of the current activity is within funds. But it is not, it's on our balance sheet.

Thank you, John. Operator, next question?

Hi, thanks. I wanted to follow up on the comments regarding the post-election leasing activity you've observed. When considering the 2025 guidance, does the occupancy assumption take into account that the leasing interest or demand in 2025 will remain stable compared to what you've experienced over the past 10 weeks? Also, if I missed it, could you share what the net absorption for 2024 was and your expectations for 2025, as well as how you foresee that trend developing throughout the year? Thank you.

We actually prepare the business plan for this following year usually in the October, November time frame. So I would say the period was right bridging around the election. It was too early to see some of the activity that we've seen. I would say compared to where our head was at the time, we are more encouraged. But let's leave it at that and let's see whether this recovery has significant legs or not. But yes, we've put our plan together right before the election and have left it there.

And as it relates to net absorption, we saw net absorption of 39 million square feet in the fourth quarter. That amounted to just shy of 150 million square feet in the year, and we are looking for 185 million, 190 million square feet of net absorption in 2025. And that is expected to build over the course of the year.

Thank you, Todd. Operator, next question?

Thanks for taking the follow-up. Just two quick ones. So you gave the GAAP NOI components. I'm just wondering if the cash NOI growth, I think you have like 3.5%, 4% bumps. Assuming the cash spread is probably in the 30s, but do you mind just bridging GAAP and cash NOI, number one? And then just number two on the net absorption view. I think Chris mentioned it will build through the year. But in the past, you sort of highlighted the rate environment is sort of crucial to that view. I'm wondering now what the offset is, given the view of rates might be stable. Maybe there's even a rate hike? Thanks.

Hey, Vikram, that's for the cash same-store. As is always the case, the most kind of volatile difference that we can see between GAAP and cash ending the year is going to be what's going on in free rent. And we are seeing free rent levels grow back to, I'll say, normal amounts of the lease value. So that's our expectation for the year and reflected in our guidance.

Yes. Regarding net absorption, as mentioned earlier in the call, customers have been postponing their decision-making. Looking ahead to 2025, we believe the new administration is reducing uncertainty, leading to improved decision-making. This shift is contributing to the increase in net absorption we anticipate throughout 2025.

Thank you, Vikram. Operator, next question?

Thanks for taking my second question. How does the higher treasury rate impact your view of where unlevered IRRs and stabilized cap rates could head in the future? And ultimately, like how do you determine what is the appropriate yield for a new U.S. speculative development start?

Sure, Vince, I'll address that. Firstly, there has been ongoing volatility in the 10-year treasury rate. Over the past year, it fluctuated by 100 basis points, but we still observed volumes returning to pre-COVID levels. Transactions are occurring, and there seems to be a misconception regarding a direct correlation between the 10-year rate and property values. In reality, determining value involves many factors, such as replacement costs and lease adjustments. So, what does this imply for values this year? We witnessed values increase in three out of the last four quarters within our open-ended funds. We haven’t experienced failures in transactions, even during a significant disposition year last year, as no deals fell through. Additionally, there is a robust demand from buyers currently. The logistics sector remains highly appealing to investors, and we are optimistic about a strong year in the transaction market, albeit with a potentially slow start. Regarding the yield for speculative developments, as I have mentioned several times during this call, we have a vast range of opportunities. We will continually seek that spread between the market cap rate and our yield, aiming for a range of 125 to 150 basis points.

Yes, let me provide some additional insight. In previous calls, we discussed how the market had not fully accounted for real estate amidst 0% or 1% treasury rates. Typically, treasuries trade about 200 basis points above the expected inflation rate. Aside from unusual actions by the Fed, this has been the standard. With inflation expectations shifting from 2% to around 3% and potentially returning to 2%, we can estimate treasury rates will be around 4% to 5%. This is where they should be. Consequently, we expect unlevered internal rates of return around 7% to 8%, yielding real inflation-adjusted returns between 300 and 500 basis points, which aligns with real estate values that sit between stocks and bonds. The market had grown accustomed to free money for too long, but the real estate sector never priced assets as if that condition would last indefinitely. While some leveraged buyers may have had different considerations, institutional capital accounts for these returns. Regarding margins, Dan is right. We aim for a 125 to 150 basis point premium over exit cap rates, which we have sought even when cap rates were at 8% or 9%. Now, with cap rates at 5% or 6%, that 125 basis points represents a significantly larger margin. Interestingly, margins have increased even during this period of weakness over the past year. Our margins remain well above expectations and our underwriting standards. While the reasons are unclear, the margins are robust, likely due to difficulties in acquiring land in supply-restrained markets.

Operator, final question, please.

Great. Thanks for taking the follow-up. Hamid, just taking a step back, I wanted to see if you could talk about your relative level of visibility into the operating environment, as you all were kind of formulating your outlook and commentary for this call. It just seems like there are a lot more moving pieces, with Trump taking office, the wildfires in L.A., tenants who have been taking longer to make decisions, the prospect of tariffs, deportation, amongst other things. So I guess how did you take all of those variables into account? And do you think there's maybe a higher level of conservatism built in because of all that?

Let me be very clear about this. This company has not reduced its guidance in the last 12 years. However, last year we did adjust our guidance as we noticed some softness. Can I confidently say there isn’t a level of conservatism in our projections considering everyone involved, from the individuals leasing space in the market to Tim? I can’t say that with certainty. Internally, there’s a bit of an ask, to be honest. I believe the market will surprise people in the latter half of the year. That’s my perspective. I’ve been wrong before, but that’s how I see it. I would say the real estate team generally feels positive, while some of our financial team members are a bit more cautious. There’s a wide range of opinions on this, so you can come to your own conclusions.

Thanks. So that was the last question, and thank you all for joining the call today. As we wrap up, we have a few thoughts we'd like to leave you with. First, we're very optimistic about the recent activity and the improving customer sentiment, and we have expectations of stronger momentum throughout the course of the year. Second, we're making great progress in our data center business. We have a growing pipeline, a very skilled team. All of this is highlighted by this Elk Grove Village transaction. And then lastly, we're very confident in the long-term earnings power of this company. Looking forward to connecting at the upcoming conferences here or during the next quarter's call. Thanks for joining.