Logistics real estate provider Prologis Inc. (NYSE: PLD) pointed to a continuation in positive momentum from the fourth quarter as the catalyst for better-than-expected first-quarter results.
The San Francisco-based company reported core funds from operations of 97 cents per share Monday, 3 cents ahead of consensus and 14 cents higher than the year-ago quarter.
“Demand driven by the powerful economic recovery, retail revolution and higher inventory levels has unfolded more strongly than we expected,” stated Tom Olinger, chief financial officer, on the company’s conference call with analysts.
Lease proposals were 93 million square feet in the first quarter, a new record and 13% higher when adjusted for the increased size of the company’s portfolio. Lease signings were 60 million square feet, which was the second-highest quarter on record. Management said e-commerce providers represented 25% of the new leases inked during the period.
Hamid Moghadam, Prologis chairman and CEO, said there has been significant demand within the consumer-packaged goods, food and beverage, and anything e-commerce-related verticals. He noted that demand for logistics space from health care companies has been increasing and said he expects demand from the housing industry to accelerate as well.
Moghadam said Amazon (NASDAQ: AMZN), which has been very active in the logistics real estate market, is making a push for smaller, last-mile properties.
“They’ve built out by far the base infrastructure of the big buildings and now it’s a trench warfare of getting the more last-touch-type locations and filling in behind it,” Moghadam said. “In terms of the square footage, it won’t add up to the same impressive numbers, but those are much higher-dollar-per-foot investments and that’s where their focus is going to be. I would say they are pretty much ahead of everyone else in terms of the backbone infrastructure, and now it’s a race for the last touch.”
Management said the industry is expected to add 300 million square feet of leased industrial real estate in 2021, the highest level ever recorded. Even with the capacity additions, land shortages continue to curb supply in many markets.
Average occupancy across the Prologis portfolio was steady year-over-year at 95.4%, rising to 96.4% by the end of the quarter. However, management said vacancies had dipped below 2% in several top markets like Southern California, Toronto and Tokyo as well as some key markets in Germany.
A sustained period of elevated retail sales and import volumes, in efforts to replenish thin inventories, have led to a lack of available logistics space. Spikes in facility replacement costs (roughly 20% to 25% higher, according to Prologis), renters carrying higher inventories and rising interest rates are driving industrial rents higher.
U.S. rent growth was above expectations at 2.4% during the quarter. Management raised expectations for rent increases in 2021 to 6.5% domestically and 6% globally. Net effective rent change, which measures the percentage change in rental rates over the lease term on new and renewed leases during the quarter, increased 27% across the portfolio (+32% in the U.S.). The growth rate was up 190 basis points year-over-year.
Retention was down 640 basis points year-over-year at 69.1%, but management said Prologis is being more selective on rental rates and credit quality.
The first-quarter outperformance resulted in a guidance raise from Prologis. The company now expects 2021 to produce core FFO in a range of $3.98 to $4.04 per share, compared to the current consensus estimate of $3.98.
Occupancy is expected to be in a range of 96.25% to 96.75%, 50 bps higher than originally guided.
New development starts were raised 16% to a range of $2.75 billion to $3.05 billion, a level seen in the past when the company’s portfolio was roughly one-quarter the size it is today. Management said the relative lower percentage of new development starts compared to a decade ago is reflective of difficulties obtaining land. However, they view it as supportive of rent growth.
Prologis Ventures is an investor in FreightWaves.
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