Prologis, Inc. (NYSE:PLD) Q1 2023 Earnings Call Transcript

Prologis, Inc. (NYSE:PLD) Q1 2023 Earnings Call Transcript April 18, 2023

Prologis, Inc. misses on earnings expectations. Reported EPS is $0.5 EPS, expectations were $0.53.

Operator Greetings and welcome to the Prologis First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder this conference is being recorded.It is now my pleasure to introduce to you Jill Sawyer, Vice President of Investor Relations. Thank you, Jill. You may begin.Jill Sawyer Thanks, Sean. Good morning, everyone. Welcome to our first quarter 2023 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations.I’d like to state that this conference 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 or other SEC filings.Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures 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 and our entire executive team are also with us today.With that I hand the call over to Tim.Tim Arndt Thanks, Jill. Good morning, everybody, and welcome to our first quarter earnings call. We began the year with results and conditions that remained strong. Market rents have continued to grow, demand has been consistent and we’re seeing sharp declines in new construction limiting future supply.While logistics real estate is very healthy, the macroeconomic picture continues to be a concern and we anticipate it could weigh on customer sentiment over the balance of the year translate into some demand that could be delayed into 2024.

However, this will overlap with a slowdown of new deliveries, creating a sustained dynamic for high occupancy and continued rent growth into next year.Beginning with our results, our core FFO excluding promotes was $1.23 per share and including promotes was $1.22 per share. Our results benefited from higher NOI in the quarter but offset by approximately $0.02 of higher insurance expense from an unusually active storm season experiencing a year’s worth of claims activity in just the first quarter.In terms of our operating results, both ending and average occupancy for the quarter were 98%, holding average occupancy flat for the fourth quarter. Rent change was 69% on a net effective basis and 42% on a cash basis each a record. The unusually wide spread between the two is reflective of lower free rent and higher escalations in our new leasing.Despite the step-up of in-place rents, our lease mark-to-market expanded to 68% during the quarter as market rent growth remained strong and slightly ahead of expectations.

With the remaining lease term of roughly four years, this lease mark-to-market represents over $2.85 per share of incremental earnings as our leases roll the market, providing visibility to future income and dividend growth. These results drove record same-store growth 9.9% on a net effective basis and 11.4% on a cash basis.During the quarter, our efforts on the balance sheet were focused on liquidity, raising over $3.6 billion in new financings for Prologis and our ventures at an interest rate of 4.6% and a term of nearly 14 years. This fundraising total does not include $1 billion of additional capacity from a recast of our global line-of-credit, which closed in April, and brings our total borrowing potential under our lines to $6.5 billion.As mentioned, fundamentals in our markets remain strong, but we expect that a more cautious outlook will weigh on the pace of demand.

This is not a new perspective as our forecast 90 days ago prepared for a weakening sentiment and how the top-down view for some occupancy loss over the year. We haven’t changed that outlook, but we also haven’t upgraded it despite the quarter’s outperformance.As an update on proprietary metrics, our proposal activity ticked up in absolute terms and is in line with strong market conditions as a percent of available space. Approximately 99% of the units across our 1.2 billion square feet are either leased or in negotiation. Utilization ticked down to 85%, which is normalizing to a level that our customers view as optimal.E-commerce leasing increased during the quarter to 19% of all new leasing. We avoid drawing conclusions from a single quarter of activity on most metrics, but it’s notable here, that e-commerce leasing picked up meaningfully back towards its five-year average.

As we’ve said before, we ultimately look at retention, pre-leasing and rent achievement as the best real-time metrics of portfolio health, and on that basis, our results are certainly very strong.We expect that the current 3.5% vacancy rate in our US markets will build to the low 4s toward the end of the year, before turning back to the mid-3s by late 2024, due to the lack of incoming supply and accounting for moderating demand. We anticipate a similar path in our European markets, and of course, even a 5% vacancy rate is historically excellent and supportive of strong rental growth.We expect this pattern to play out in our true months of supply metric, which was a very healthy 30 months in the US and should decline into the 20s next year. We are launching markets that have large development pipelines such as a few in the Sunbelt in the US, but so far that supply also seems manageable.In Europe, most of our focus is on the UK, where development starts have continued even as demand has moderated, which will lift market vacancies and may pressure rents.

And Japan is also a market which is expected to see larger increases in vacancy over the year, but similarly, expects a slowdown in new supply due to surges in land and construction costs. Taking all of these movements into account, we are holding our market rent growth forecast for the year at 10% in the US and 9% globally.In capital markets, transactions continue to be few and far between, but the pickup in activity suggests, we will see a busier second quarter. Appraised values in our funds declined 1% in the US and 2% in Europe during the quarter and 8% and 18% respectively from the peak. It’s worth noting that our view of public market prices and NAVs that they have adjusted much more than is warranted for these levels of write-down.Redemption requests and our open-ended funds have slowed significantly with the redemption queue nearly unchanged around 5% of net asset value.

This is reflective of both a slower pace of new redemptions as well as rescissions of prior requests. Combined with over $150 million of new commitments made our net queue is essentially unchanged from last year.Last quarter, we described our approach to fulfilling redemption requests, which is based on an overarching objective to be consistent and fair to all investors, requiring a few quarters for valuers to catch up. In that regard, as appraisal seem to be nearing fair value, we plan to redeem units in this quarter, given the swift response to value changes in Europe and expect to do the same in USLF next quarter. In turn, we view this as an excellent time to invest more of our capital into the vehicles, which we’ll be doing over the coming quarters and some meaningful numbers.Turning to guidance.

We are tightening and increasing average occupancy to range between 97.25% and 97.75%, a 25 basis point increase at the midpoint. Our same-store will benefit from this increase driving our net effective guidance to a range of 8.5% to 9.25%, and cash same-store of 9% to 9.75%.We are forecasting our lease mark-to-market to end the year close to 70%. Extracting the 2024 component of this suggests rent change should exceed 85% next year, even without continued market rent growth, which is a clear illustration of how our exceptional rent change will not only endure but continue to grow.We expect G&A to range between $380 million and $390 million and strategic capital revenues excluding promotes to range between $515 million and $530 million. We are maintaining our forecast for net promote income of $380 million, and given the size of USLF and the potential for small changes in value to have a meaningful impact, there is potential for upside here and we believe we have the downside covered.We had few development starts in the quarter, a reflection of our discipline, but our pipeline is deep and we are maintaining our guidance of $2.5 billion to $3 billion for the year.

We expect the pace to remain slow in the second quarter, putting the bulk of the activity into the second half. It’s noteworthy that following the belief that construction costs may decline in the coming quarters. We now see them as likely to increase mostly in line with inflation.As new fundraising has become visible, we forecast contributions to be concentrated in the second half totaling $2 billion to $3 billion when combined with forecasted dispositions. So in total, we expect GAAP earnings to range between $3.10 per share and $3.25 per share. We are increasing our core FFO including promotes guidance to a range of $5.42 per share to $5.50 per share, and further, we are guiding core FFO excluding promotes to range between $5.02 per share and $5.10 per share, with the midpoint representing 10% growth over 2022.I’d like to close with a few observations that we’ve made about our standing in the equity markets, which we found interesting and wanted to share.

Today, we sit as the 68th largest company in the S&P 500 ahead of names like GE, American Express, Cigna, Citigroup, as well as Ford and GM combined.Also of notice that with our planned $3.3 billion of dividends this year, we ranked 42nd in terms of total cash return to investors. Of these top 42 dividend payers, Prologis has outgrown the group by 500 basis points per year over the last three years. And in fact, since our IPO, we have paid over $15 billion in dividends at a 15% CAGR, ranking 13th on growth in the entire S&P 100. While getting bigger has never been our objective, we thought the context would be eye-opening.So in closing, we feel great about the health of our business, even in the face of a slowing economy, most importantly, nothing we have seen alters the path of its underlying secular drivers for the long-term potential of our platform.

In that regard, we’re excited to tell you much more about that outlook and our platform later in the year.Last week, we announced our upcoming Investor Day to be held at the New York Stock Exchange this December. We hope to see many of you there in person and tuned into the live webcast, where we will showcase our deep bench of talents and the strong differentiators that define our company. More details on that to come.But with that I’ll hand it back to the operator for your questions.

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Question-and-Answer Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.Caitlin Burrows Hi. Good morning, everyone.

Maybe on development. Tim, you touched on it briefly, but the earnings release mentions how the build-out of your land bank is a driver of growth, and this quarter, like you mentioned starts for only like $50 million versus recent quarters over a billion. And it sounds like that is expected to ramp up significantly to over a billion again in the second half. So just wondering what metrics or other things that you’re looking at to drive the starts activity? And what makes you confident that increasing starts so significantly later this year is kind of possible and the right thing to do?Dan Letter Hi, Caitlin. This is Dan. I’ll take a stab at that. Maybe Tim can pile on then. But first of all, let me just say, our teams are very much on the offense out there.

Every day our teams around the globe looking at new opportunities. We have over $38 billion of potential TEI embedded in our land bank, and we could flip the switch tomorrow and start $10 billion if we wanted to. We’re going to continue to look at these deals on a case-by-case basis, but when you see the overall volatility in the market, you see the 10-year move 50 basis points, 60 basis points on a weekly basis like we have, we’re maintaining the discipline, and we’re disciplined because we can be. And we’re ramping-up our starts towards the end of the year, while we expect to see the overall marketplace ramp down.Operator And our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.Ki Bin Kim Thank you.

Good morning. So net absorption across the US in the first quarter was a little bit lighter than what we’ve seen in recent memory. So I was just curious what kind of risk do you see to occupancy or rent growth as a sector tries to in the near term absorb the new supply coming through?Hamid Moghadam Hi, Ki Bin. This is Hamid. There’s always a risk in this environment. I mean there’s so many unknowables, but we’ve gotten spoiled to 350 million square feet of demand in the last couple of years. Let’s just put this in a context. I mean in the past, we would have been very happy with even these lower levels of absorption, particularly when you consider that starts are way down and they’re going to — deliveries are going to really slow down as we go into 2024.So it’s normalizing.

That’s the best way I can describe, but I wouldn’t even be surprised if it falls further given all the stuff that we read in the papers. The CEOs that are making big CapEx decisions, basically push their people to see if they can start the week — a quarter later or two quarters later. But that’s all borrow demand, if you will, that is future demand that is getting deferred. So we’re not that excited by one way or another.And just to finish the previous question that Dan started, our view, we don’t have a forecast for development starts. We only have one because you guys asked us for one. We don’t internally have one. We have a plan. We have entitlements on much of that land, about 80% of that land, we can start at any time.And we don’t just look at our data at the end-of-the quarter.

We see it every day as we lease a million square feet a day, so we can meter that development into the marketplace, as we see fit and make those adjustments. We’re ready to go if we need to do more or less either way.At the end of the day, our company’s story is about organic growth, and that’s the high value form of growth and that’s the one that we pay the most attention to, and actually, that’s easier to figure out in this environment, given the very big mark-to-market which I’ve never seen in this business before. So in a way, our job is actually easier in terms of predictability of earnings and growth.Operator And our next question comes from the line of Steve Sakwa with Evercore. Please proceed with your question.Steve Sakwa Yeah. Thanks.

Good morning. I just wanted to focus a little bit on the acquisitions, which is not a very large number in there, Hamid, but I’m just wondering what you’re seeing from a distressed opportunity said, and then maybe tie into the comments Tim made about the funds and you know you tend to like you’d be putting more money into the funds as you redeem some of the partners. So just trying to put tie those two I guess capital uses together.Hamid Moghadam Sure. I think there is very little distress in the marketplace. Industrial real estate has done really well. I assume other people have significant mark-to-market, although I doubt if there — it’s quite the same level as ours. But there is protection in terms of that mark-to-market and other portfolios, and there are no fore sellers because leverage in the industry is pretty low.So we’re not looking for distressed opportunities, but we are looking for opportunities that reflect the increasing cost of capital compared to call it a year, year and a half ago.