Prologis (PLD) Q3 FFO Tops Estimates On Rent Growth, View Up

Prologis, Inc. (NYSE:PLD) reported third-quarter 2019 core funds from operations (FFO) per share of 97 cents, beating the Zacks Consensus Estimate of 93 cents. Results also compare favorably with the year-ago figure of 72 cents. Notably, the company had net promote income of 18 cents in the just-reported quarter, while no promotes were earned in the year-ago period.

The company witnessed rent growth in the third quarter, but period-end occupancy moderated slightly as the company prioritized rent over occupancy. Moreover, results reflect substantial earnings from the company’s strategic capital business. The industrial real estate investment trust (REIT) also raised its guidance for 2019 core FFO per share.

Prologis generated rental revenues of $710.5 million, which registered 16.7% growth from the prior-year quarter. However, the figure narrowly missed the Zacks Consensus Estimate of $713.2 million.

Quarter in Detail

At the end of the reported quarter, occupancy level in the company’s owned-and-managed portfolio was 96.5%, down 100 basis points year over year, indicating the company’s strategy of prioritizing rent over occupancy. However, during the quarter, 38 million square feet of leases commenced in the company’s owned-and-managed portfolio, up from 37 million square feet in the year-ago period.

Prologis’ share of net effective rent change was 37% in the July-September quarter compared with 22.6% recorded a year ago. This was driven by the United States at 41.7%. Cash rent change was 21.4%, as against 11.6% recorded in the year-earlier quarter. However, cash same-store net operating income (NOI) registered 4.3% growth compared with the 5.9% increase reported in the comparable period last year, with the company emphasizing on rent over occupancy.

In third-quarter 2019, Prologis’ share of building acquisitions amounted to $191 million, with a weighted average stabilized cap rate of 4.3%. Development stabilization aggregated $658 million, while development starts totaled $577 million, with 63.6% being build-to-suit. Furthermore, the company’s total dispositions and contributions came in at $498 million, with weighted average stabilized cap rate (excluding land and other real estate) of 4.8%.

Liquidity

The company exited the September-end quarter with cash and cash equivalents of $1.02 billion, up from the $401.2 million recorded at the end of the previous quarter. Prologis ended the quarter with leverage of 18.4% on a market capitalization basis and debt-to-adjusted EBITDA of 3.9x and $4.9 billion of liquidity.

Notably, during the reported quarter, the company and its co-investment ventures issued $2.8 billion of debt, mainly in euros. This was done at a weighted average fixed interest rate of less than 1% and a weighted average term of more than 14 years.

Outlook Raised

Prologis raised its core FFO per share outlook for full-year 2019. The company projects core FFO per share of $3.30-$3.32, up from the $3.26-$3.30 estimated earlier. The guidance is above the Zacks Consensus Estimate of $3.27.

The company forecasts year-end occupancy of 96.5-97.0% against the prior projection of 96.5-97.5%, and cash same-store NOI (Prologis share) of 4.75-5.0% compared with the prior projection of 4.5-5%.

Our Take

We are encouraged with Prologis’ better-than-expected performance in terms of FFO per share in the third quarter. In a rising e-commerce market, the industrial real estate asset category has grabbed headlines and continues to play a pivotal role, transforming the way how consumers shop and receive their goods. Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals.

Amid this environment, Prologis remains well poised to grow, backed by its balance-sheet strength and prudent financial management. The company’s financing activities in the latest reported quarter has helped it lower total weighted average interest rate and lengthen weighted average maturity.

Nevertheless, recovery in the industrial market has continued for long and a whole lot of new buildings are becoming available in the market, leading to higher supply and lesser scope for rent and occupancy growth. Additionally, any protectionist trade policies will have an adverse impact on economic growth, as well as the company’s business over the long haul.

Prologis currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We now look forward to the earnings releases of other REITs like SL Green Realty Corp. (NYSE:SLG) , Crown Castle International Corp. (NYSE:CCI) and PS Business Parks Inc. (NYSE:PSB) . While SL Green and Crown Castle are slated to report third-quarter earnings on Oct 16, PS Business Parks has its earnings release scheduled for Oct 22.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.


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