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Prologis Inc Earnings - Analysis & Highlights for Q4 2024
Overview
PositivesNegativesOutlook
- Net effective lease mark-to-market finished the year at 30% and represents a further $1.4 billion of incremental NOI.
- Net effective and cash same-store growth during Q4 were 6.6% and 6.7%, respectively.
- 3PLs in the back half of the year, leased nearly 50 million feet.
- Capital recycling was active in Q4, with $2 billion of assets contributed to strategic capital ventures, bringing the full year total to over $3.3 billion.
- The company expects an inflection in positive growth to emerge later this year.
- Rents declined by 2% in Q4.
- The development start volume has been low.
- The company is forecasting average occupancy to range between 94.5% and 95.5%, which contemplates a dip in occupancy over the next one to two quarters.
- The credit loss issue is not a big explanation for the change.
- The company expects modest further decline from current levels in a handful of submarkets.
- The company expects an inflection in positive growth to emerge later this year.
- The company expects completions to come way down.
- The company is forecasting development starts to range between $2.25 billion and $2.75 billion.
- The company is establishing its initial GAAP earnings guidance in a range of $3.45 to $3.70 per share.
Q&A Highlights from Prologis Inc Earnings Call Q4 2024
- Analyst asked about the actual realized market rent growth in different regions, specifically the US versus other regions, and the company's updated forecast for 2025.
- The company had rents decline by roughly 2% in the quarter, and there was a differential between coastal and non-coastal regions, although it had narrowed in the fourth quarter. The company expects modest further decline from the current level in a handful of submarkets, but an inflection in positive growth is expected later this year. The company's long-term earnings and value of the business are not impacted by rent fluctuations, and replacement cost rents are 15% higher than market rents, which is the ultimate driver of rent growth.
- The company had rents decline by roughly 2% in the quarter, and there was a differential between coastal and non-coastal regions, although it had narrowed in the fourth quarter. The company expects modest further decline from the current level in a handful of submarkets, but an inflection in positive growth is expected later this year. The company's long-term earnings and value of the business are not impacted by rent fluctuations, and replacement cost rents are 15% higher than market rents, which is the ultimate driver of rent growth.
- Analyst asked about the magnitude of improvement in the company's leasing activity and the drivers behind it.
- The company saw a tale of two markets in the last quarter, with the first five to six weeks being quiet, and customers waiting to see what would happen with the election. Post-election, there was a boom in leasing activity, with resiliency from e-commerce, general goods, electronics, and food and beverage. The company heard from customers that they were working through gray space and focused on cost containment, but also from customers who were breaking records in leasing. The pipeline is up 17% January to January, and the end of the fourth quarter and beginning of the first quarter are usually slow times, making the bump in leasing activity even more significant.
- The company saw a tale of two markets in the last quarter, with the first five to six weeks being quiet, and customers waiting to see what would happen with the election. Post-election, there was a boom in leasing activity, with resiliency from e-commerce, general goods, electronics, and food and beverage. The company heard from customers that they were working through gray space and focused on cost containment, but also from customers who were breaking records in leasing. The pipeline is up 17% January to January, and the end of the fourth quarter and beginning of the first quarter are usually slow times, making the bump in leasing activity even more significant.
- Analyst asked about the company's occupancy outperformance and how much of it is seasonal versus potential bad debt.
- Management explained that the company has a history of outperforming the market on occupancy by 100-150 basis points, and that this trend has continued in recent quarters, with outperformance nearly doubling. They also mentioned that there are two particular leases that will have a slight impact on the overall average, but they expect to rebuild the outperformance level by the end of the year.
- Management explained that the company has a history of outperforming the market on occupancy by 100-150 basis points, and that this trend has continued in recent quarters, with outperformance nearly doubling. They also mentioned that there are two particular leases that will have a slight impact on the overall average, but they expect to rebuild the outperformance level by the end of the year.
- Analyst asked about the renewal business and if there are any changes in the trends.
- Management responded that there are still many customers interested in renewing, but there are also new requirements coming to the market, and the company has seen an expansion in its new leasing pipeline. They explained that both renewals and new leases can happen at the same time and are not mutually exclusive.
- Management responded that there are still many customers interested in renewing, but there are also new requirements coming to the market, and the company has seen an expansion in its new leasing pipeline. They explained that both renewals and new leases can happen at the same time and are not mutually exclusive.
- Analyst asked about the reasons for customers moving out of the portfolio.
- Management responded that customers may move out of the portfolio due to needing more or less space, or needing space in a different location. However, when the portfolio is 95% leased, options are limited, and sometimes the company loses customers due to this reason. They also mentioned that in a stable environment, customers prefer to renew, as it is less costly.
- Management responded that customers may move out of the portfolio due to needing more or less space, or needing space in a different location. However, when the portfolio is 95% leased, options are limited, and sometimes the company loses customers due to this reason. They also mentioned that in a stable environment, customers prefer to renew, as it is less costly.
- Analyst asked about the cadence of same-store NOI throughout 2025, specifically if it will gradually come down towards the 4.5% cash midpoint.
- Timothy Arndt explained that the cadence of same-store NOI will depend on occupancy, with a potential giveback in the front half of the year followed by a rebuild in the second half. He also noted that rent change is expected to be relatively level over the quarters.
- Timothy Arndt explained that the cadence of same-store NOI will depend on occupancy, with a potential giveback in the front half of the year followed by a rebuild in the second half. He also noted that rent change is expected to be relatively level over the quarters.
- Analyst asked about the pickup in the build-to-suit side and if it will continue to be a strong proponent this year.
- Dan Letter replied that the build-to-suit side is expected to improve year-over-year, with a long-term average of about 40% of overall development starts. He also mentioned that the company has hundreds of opportunities and will pay attention to each deal-by-deal and market-by-market basis.
- Dan Letter replied that the build-to-suit side is expected to improve year-over-year, with a long-term average of about 40% of overall development starts. He also mentioned that the company has hundreds of opportunities and will pay attention to each deal-by-deal and market-by-market basis.
- Analyst asked about the possibility of establishing a data center fund or some kind of structure with recurring income.
- Hamid R. Moghadam, CEO of Prologis Inc., stated that the company has not yet made the decision regarding the capitalization of its data center business long-term. The current thinking is that they will monetize and sell these assets upon completion and use the capital to expand their core logistics business. However, they may expand the strategy to include a fund management approach, either a dedicated fund or expanding the investment mandate of some of the existing open-end funds.
- Hamid R. Moghadam, CEO of Prologis Inc., stated that the company has not yet made the decision regarding the capitalization of its data center business long-term. The current thinking is that they will monetize and sell these assets upon completion and use the capital to expand their core logistics business. However, they may expand the strategy to include a fund management approach, either a dedicated fund or expanding the investment mandate of some of the existing open-end funds.
- Analyst asked about the guidance and occupancy assumption for 2025, assuming that leasing interest or demand remains consistent with what has been seen in the last 10 weeks.
- Hamid R. Moghadam stated that the company prepares the business plan for the following year in the October/November timeframe, which was too early to see some of the activity that has been seen. However, they are more encouraged by the recent activity, but they will see whether this recovery has significant legs or not. The guidance and occupancy assumption for 2025 assume a consistent level of leasing interest or demand.
- Hamid R. Moghadam stated that the company prepares the business plan for the following year in the October/November timeframe, which was too early to see some of the activity that has been seen. However, they are more encouraged by the recent activity, but they will see whether this recovery has significant legs or not. The guidance and occupancy assumption for 2025 assume a consistent level of leasing interest or demand.
- Analyst asked about net absorption in 2024 and the company's expectation for 2025 and how it is expected to trend throughout the year.
- Christopher N. Caton, COO of Prologis Inc., stated that the company saw net absorption of 39 million square feet in Q4, amounting to just shy of 150 million square feet in 2024. They are looking for 185 million square feet, 190 million square feet of net absorption in 2025, and that is expected to build over the course of the year.
- Christopher N. Caton, COO of Prologis Inc., stated that the company saw net absorption of 39 million square feet in Q4, amounting to just shy of 150 million square feet in 2024. They are looking for 185 million square feet, 190 million square feet of net absorption in 2025, and that is expected to build over the course of the year.
- Analyst asked about the impact of higher treasury rates on the company's view of unlevered IRRs and stabilized cap rates, and how they determine the appropriate yield for new US speculative development starts.
- Management stated that there is volatility in the 10-year rate, but deals are still happening and volumes are growing. They also mentioned that there is no 1:1 correlation between 10-year rates and value, and that there are many other considerations to take into account when making investment decisions. They believe that the transaction market will be strong in 2023, with a slow start to the year, and that the company will see a lot of opportunities with a 125-150 basis point spread from market cap rates to their yield. Additionally, they noted that treasury rates have historically been trading at about 200 basis points over the implied inflation rate, and that with inflation expectations now at 2%-3%, treasuries should be around 4%-5%. This means that IRRs will be 7%-8% unlevered, giving a real inflation-adjusted return of 300-500 basis points. They also mentioned that margins have increased even in this period of weakness, and that the company is able to underwrite property with a 125-150 basis point premium over exit cap rates.
- Management stated that there is volatility in the 10-year rate, but deals are still happening and volumes are growing. They also mentioned that there is no 1:1 correlation between 10-year rates and value, and that there are many other considerations to take into account when making investment decisions. They believe that the transaction market will be strong in 2023, with a slow start to the year, and that the company will see a lot of opportunities with a 125-150 basis point spread from market cap rates to their yield. Additionally, they noted that treasury rates have historically been trading at about 200 basis points over the implied inflation rate, and that with inflation expectations now at 2%-3%, treasuries should be around 4%-5%. This means that IRRs will be 7%-8% unlevered, giving a real inflation-adjusted return of 300-500 basis points. They also mentioned that margins have increased even in this period of weakness, and that the company is able to underwrite property with a 125-150 basis point premium over exit cap rates.