Prologis Earnings: Decent Results as Demand for Industrial Properties Remains Resilient

No-moat-rated Prologis PLD reported decent results in the first quarter with the firm reporting core funds from operations, or FFO, of $1.22 per share, 12% higher than the $1.09 in FFO during the first quarter of 2022. The real estate operations reported a core FFO of $1.16 per share in the first quarter, which was 16% higher on a year-over-year basis, whereas the core FFO in the strategic capital segment was reported at $0.06 per share compared with the $0.09 per share reported a year ago. The strength in the industrial sector over the past few years is evident from the fact that the net effective re-leasing spread for the leases signed in the first quarter was 68.8%. Although the re-leasing spreads are still exceptionally high for top-notch industrial real estate, we think that the growth in market rents will moderate in the near to medium term largely because of the weaker macroeconomic backdrop. We are maintaining our $124 per share fair value estimate for Prologis after incorporating the first-quarter results.

The same-store net effective net operating income, or NOI, increased by 9.9% on a year-over-year basis in the first quarter as high mark-to-market on the current leases of the company ensures robust NOI growth for many years. Management expects the same-store net effective NOI to grow by 8.50%-9.25% in 2023, which will mainly be driven by rent hikes on the new leases signed during the year. The overall average portfolio occupancy rate was flat on a sequential basis and increased by 60 basis points on a year-over-year basis as it was reported at 98.0% for the current quarter. As we have highlighted earlier, the current level of occupancy is pretty high, and we do not expect the firm to maintain these levels of occupancy on a midcycle basis. Management has guided for an average occupancy rate of 97.0%-97.5% for full-year 2023, reflecting the pressure from a softer economy and strong supply-side deliveries.