Q3 2024 Earnings Summary
- Prologis owns land in over 50 markets globally, with plenty of opportunities that pencil today. They have a land bank that includes covered land plays and options not visible in the land bank, indicating no shortage of opportunities for development.
- Prologis has significant capacity on its balance sheet, with healthy and strong credit ratios. Strategic capital fundraising is improving, providing ample funding for future growth and acquisitions.
- Southern California has a bright outlook, being a $2 trillion economy with 23 million people. Employment is up in the last year, and container imports are up 12% since 2019. High and rising barriers to supply restrict new development, positioning Prologis favorably in this key market.
- Conditions remained soft in many of Prologis's markets, with net absorption below pre-COVID levels, impacting rents. Globally, market rents decreased approximately 3% this quarter.
- Higher bankruptcy filings are affecting revenues, with bad debt impacting revenues by approximately 35 basis points, elevated from the normal 15-20 basis points. The company expects higher bankruptcies in the balance of the year, leading to increased noncash write-offs.
- Demand remains soft in Southern California, with Class A outperforming Class B properties. The excess capacity in this key market will take time to work through, potentially impacting rents and occupancy.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +6% | Driven by higher rental revenue and moderate strategic capital revenue growth, partially offset by a decrease in promote income compared to the prior period. This reflects the continued expansion of the core portfolio and steady demand for logistics space. |
Real Estate | +7% | Resulting from new property acquisitions, improved occupancy, and rent escalations that outpaced higher property-level expenses. The segment benefited from ongoing customer demand and asset growth. |
Operating Income (EBIT) | +42% | The strong revenue increase outstripped the growth in operating costs, with gains on real estate transactions also contributing. This underscores the leverage from higher market rents and successful portfolio management. |
Interest Expense | -52% | Primarily reflecting lower net debt due to dispositions and refinancings at favorable interest rates, compared to the previous period. This reduced the overall cost of borrowing and improved liquidity. |
U.S. | -13% | Attributed to a moderation of strategic capital activity and slightly lower occupancy in select gateway markets. Prologis also focused on pushing rents, which affected leasing volumes and short-term results. |
Other Americas | +16% | Benefited from strong demand in markets like Mexico, driven by nearshoring trends and increased transactional activity, leading to higher revenue and net operating income. |
Europe | +10% | Supported by stable occupancy and controlled supply in core European logistics hubs, enabling rent growth and helping offset any macroeconomic headwinds in the region. |
Asia | -6% | Reflects softening economic conditions in parts of Asia, especially China, leading to slower consumption demand and modest rent growth. Japan remains relatively stable, but overall regional performance dipped. |
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Market Rent Growth Outlook
Q: How do rent growth forecasts align with prior guidance?
A: Management confirms that near-term rent growth remains soft, with market rents declining 3% this quarter. They anticipate softness to persist into the middle of next year but highlight that replacement cost rents are 15% higher than current market rents. They stress that long-term earnings won't be significantly impacted and expect rent recovery beginning late next year and accelerating thereafter. -
Demand Recovery Timing
Q: When will customer demand pick up and utilization improve?
A: Management notes that customers are engaged but taking longer to make decisions due to spare capacity in supply chains. They observe that utilization has increased from below 84% at the start of the year to mid-84% now, indicating customers are working through spare capacity. They expect demand recovery to emerge late next year and accelerate into 2026, but the exact timing is uncertain. -
Core FFO Beat vs. Guidance
Q: Why did you only raise full-year guidance by $0.01 despite a $0.06 beat?
A: Management explains that the perceived beat was due to previously forecasted events, including gains from Prologis Ventures exits and tax items. They do not consider it a beat and note that currency gains were largely unrealized and hedged. Therefore, they only modestly raised full-year guidance as these events were already contemplated. -
Capital Deployment and Funding
Q: How will you fund increased acquisitions and what's planned?
A: Management expresses confidence in their long-term outlook, with increased acquisitions reflecting that confidence. They have significant balance sheet capacity and anticipate more normalized levels of capital recycling soon. Acquisitions are globally spread, focusing on markets where they seek to build additional scale. Funding will come from their strong balance sheet and improved strategic capital fundraising. -
Occupancy and Vacancy Trends
Q: When does availability peak, and how will occupancy affect earnings?
A: Management expects market vacancies to peak later this year but suggests the peak may extend into early next year due to cautious demand. Recovery is expected to emerge later next year and accelerate into 2026. They note that forecasting occupancy is challenging but acknowledge that declining occupancy could be a headwind for same-store growth. -
Asian E-commerce and 3PL Demand
Q: Is increased demand from Asian 3PLs sustainable?
A: Management confirms they are leasing with these customers and expect them to continue leasing into next year and beyond. They note that Asian 3PLs represent roughly 20% of net absorption this year. Growth is driven by shifts in business models due to past tariffs and the acceleration of Asian imports, which are up 21% since 2019. They apply rigorous credit evaluations to these customers. -
Digital and Energy Business Update
Q: What's the progress on digital and energy initiatives?
A: Management reports progress in their energy business, with over 50 megawatts of new solar starts this quarter, expanding globally. In data centers, they have 1.6 gigawatts of secured power, with 490 megawatts under construction, and are building internal capabilities. A portion of development starts this quarter includes a powered shell converted to a turnkey data center deal. -
CapEx Increase Explanation
Q: What drove the jump in CapEx this quarter?
A: The increase in CapEx is attributed to significant leasing activity, particularly in Southern California, where high rents lead to higher commissions. Property improvement expenses can be lumpy between quarters, but on a trailing 12-month basis, they are normal. -
Regional Occupancy Trends
Q: Why did occupancy in Asia and Latin America decline?
A: Management attributes occupancy declines primarily to impacts in China, with some oversupply issues in Japan. While the U.S. portfolio is stabilizing, Asia and Latin America have experienced setbacks due to regional factors. -
Short-term Lease Trends
Q: Why are there more leases under one year?
A: Management notes that some customers opt for shorter-term leases due to uncertainty. Additionally, in certain markets, they strategically offer shorter leases anticipating rent recovery and preferring to reset rents sooner. -
Net Absorption and Supply Completions
Q: What were net absorption and completions this quarter?
A: Net absorption was 40 million square feet, and completions were 63 million square feet in the U.S.. Deliveries have declined from a peak of 135 million square feet per quarter a year ago and are expected to continue declining. The under-construction pipeline is at its lowest point since 2017. -
Development Stabilization Guidance
Q: Any regions driving higher development stabilization?
A: Management states that their development book is spread globally, with no specific regions driving higher stabilization guidance.
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