Prologis beats Q2 expectations, lowers rent growth forecast

Logistics real estate operator Prologis lowered its 2023 rent growth forecast as it expects vacancies to tick higher in the near term.

Prologis (NYSE: PLD) on Tuesday reported core funds from operations (FFO) of $1.83 per share for the second quarter, 16 cents higher than the consensus estimate and 72 cents higher year over year (y/y). Consolidated revenue increased 96% y/y to $2.45 billion given higher rents and previous acquisitions.

Management from the company said it believes vacancies will increase to a mid-4% range by year-end, compared to 2.5% in the second quarter. The moderate deterioration will likely be stemmed as development starts (down 40% in the quarter) slow this year, management said.

The company is now calling for rent growth of 7% to 9% globally. The prior forecast for 2023 was 9% rent growth globally and a 10% increase in the U.S.

Management called out weakness in Southern California as a primary catalyst for the updated outlook. Lower imports to the West Coast are driving some of the degradation. That market is also normalizing from recent tightness, which was marked by 99% occupancy and rent growth of more than 130% since 2020.

Management said the mark to market on its portfolio (over the life of the lease) in Southern California is well over 100%.

“We’re back to 2019. … Demand, supply, rental growth — all of those things are trending back to 2019 pre-COVID,” co-founder and CEO Hamid Moghadam said on a call with analysts. “In 2019, [if] somebody would tell you that in 2023 you’re still talking about the dynamics of [the] 2019 market, I’d be jumping up and down happy about that.”

Moghadam said marking existing leases to current market rents across Prologis’ entire portfolio equates to a mid-60% increase. Even assuming no rent growth moving forward, he believes the company would see same-store net operating income increase 7.5% annually over the next four to five years.

Occupancy remained high across Prologis’ portfolio in the second quarter at 97.5%, which was 50 basis points lower than in the first quarter. Net effective rent change (over the entire lease term) was up 33 percentage points to 78.5%.

The company raised core FFO guidance by 2% to a range of $5.56 to $5.60, which was 9 cents higher than the consensus estimate (at the midpoint of the range) at the time of the print.

At the end of June, Prologis announced it acquired $3.1 billion in industrial real estate assets from Blackstone (NYSE: BX).

Shares of PLD were off 5.2% at 1:32 p.m. EDT on Tuesday compared to the S&P 500, which was up 0.5%.

Editor’s note: Prologis Ventures is an investor in FreightWaves.

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