Prologis: “Unprecedented Area” Logistics Real Estate Market

Logistics warehouse operator Prologis Inc. sees the space market as tight for some time. In a first-quarter earnings call with analysts on Tuesday, management said management still had the lowest supply available in the market.

Prologis (NYSE: PLD) More than previously expected in the first quarter, the core fund (FFO) from investment was $ 1.09, two cents ahead of the consensus and 12 cents higher than the previous year.

Supply is tight as high consumer demand continues and new projects are delayed online. The “true supply months” compared to current vacancies and net absorption tracking the development pipeline decreased to 16 months in the 30 major US markets that Prologis is tracking. Historically, the metric has been hovering for about 36 months during the expansion period.

During the first quarter, occupancy did not experience the usual seasonal decline. It was flat at 97.4% in the fourth quarter. This indicator was 200 basis points higher than the previous year, as 98.1% of Prologis’ portfolio was leased by the end of the period.

KPI table

Table: Prologis Key Performance Indicators

Co-founder and CEO Hamid Moghadam said the U.S. market needs an additional 800 million square feet of incremental space, showing a 10% lower inventory-to-sales ratio than pre-pandemic levels. .. He said that in addition to 10% of the required replacements, many supply chains would consider adding an additional 10% cushion to avoid future out-of-stocks.

“People are running to keep up with the demand they see from their end customers, but they haven’t reached it. They’re always behind,” Mogadam said.

He said inventories temporarily declined by about 5% in connection with changes in consumer habits, from goods to services and experience, which tended to lead to COVID. As a result, he believes that 15% of inventory is still needed throughout the supply chain and additional space is needed.

Prologis predicts that US market rents will increase by 22% compared to the 11% forecast provided in the last update.

“We are in an unprecedented territory,” Moghadam said. “Industrial rents have never risen at these levels, but market conditions haven’t been as they are today. I’ve never done e-commerce at this level of importance. I’ve never eaten. [inventory] Resilience is a huge factor. There were no supply chain bottlenecks that could clog the network. “

Net effective rent fluctuations (average rate over lease) for the first quarter were 37% for the entire portfolio and 41.5% for the United States.

Mogadam said rents continue to outpace acquisition and new construction costs, but the gap is likely to close in the future. He pointed out the surge in energy and labor costs as a reason. Importantly, rent accounts for only 3% to 5% of total supply chain costs, making it easier for businesses like Prologis to drive growth.

The company predicts that market rents will rise 25% to 26% in the coastal market in 2022 and will rise in the mid-teens in the inland areas.

Prologis expects net income in 2022 to range from $ 4.85 to $ 5 per share. This is a 10% increase in the outlook provided just three months ago. Core FFO guidance has been raised by almost 2% to the range of $ 5.10 to $ 5.16 per share. This is above the print consensus estimate of $ 5.04.

Mogadam avoided the possibility of a recession, at least in the short term.

“We are only looking at what our customers are saying to us, what they are doing, and the actions and words they are using. Your favorable specific long-term Customers are very positive because they are benefiting from these trends. ”He said that risks such as inflation, rising fuel costs, wars in Ukraine, and midterm elections could reverse the favorable trends. I admitted that there was a possibility of a headwind.

“Seeing your forefoot sticking forward and occupying more space gives you the peace of mind that you’re not facing a recession, at least when it comes to our business. “Mr. Mogadam said.

The market capitalization at the end of the quarter was 13.5% and the weighted average interest rate was 1.7%. The company is “insulated by this rate of increase” as it has no significant debt maturity until 2026. Prologis has ended its term with a total investment capacity of $ 18 billion.

Prologis Ventures is an investor in Freight Waves.

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