What Investors Can Learn About The 'Good & Getting Better' Outlook From Prologis Q4 Earnings Call
Prologis Inc (NYSE: PLD) is by far the largest industrial REIT with a market cap that is now close to $23 billion.
In many respects because of its global reach and scale, Prologis can provide investors with a unique real world window and perspective on economic growth and real estate markets in the Americas, Europe, and Asia/Pacific.
The company leases modern distribution facilities to more than 4,700 customers, and as of December 31, 2014, owned or had investments in properties and development projects expected to total approximately 590 million square feet (55 million square meters) in 21 countries.
According to CEO Hamid Moghadam, ""The global nature of our platform allows us to deploy capital where we see the highest risk-adjusted returns."
"In the U.S., where market conditions are very strong and values are high, we were a net seller of non-strategic holdings. In Europe, the focus has been on net deployment where we acquired quality assets in target markets at a discount to replacement costs."
Key Metrics Are Strong
- Prologis ended Q4 2014 with 96.1 percent occupancy, 100 bps (basis points) over the same period in 2013, and 110 bps over the previous quarter.
- The increase was primarily driven by small spaces (under 100,000 SF) and 140 bps increase in the PDL European portfolio.
- Full year 2014 core FFO came in at $1.88 per share, an increase of 14 percent over 2013.
- Overall Prologis expects 2015 core FFO of $2.04 to $2.12 per share, representing a Y/Y increase of 11 percent at the midpoint.
Americas - "Good & Getting Better"
- In the U.S., net absorption of space in 2014 was double the rate of deliveries. The strong demand resulted in rent roll-overs increasing for the eighth consecutive quarter.
- In the Americas, GAAP rental rates on Q4 signed leases increased 11.5 percent.
- Prologis forecasts 2015 deliveries of 165 million SF against absorption of 225 million SF, leading to further increases in occupancies.
- U.S. "big box" demand is heavily weighted toward e-commerce, "we don't see that slowing down…"
- In the Americas Prologis has nine markets above 98 percent occupancy and 19 markets above 96 percent, the highest ever.
Europe - Industrial Markets
- The PLD 2015 forecasts did not anticipate the recently announced European Central Bank quantitative easing, which should be a net positive.
- European cap rate compression of 75 to 100 bps will make it tougher to acquire large portfolios going forward.
- Cap rate compression has been a headwind on rental rate growth in Europe, as expected.
- Prologis is trying to keep lease terms shorter in Continental Europe -- 36 months on average -- to take advantage of future growth hopefully driving higher rates.
Global Cap Rate Estimates
- U.S. Industrial cap rates: Very best markets, low 4s. Low 5s in most markets (for brand new Class-A product with a strong credit tenant). Less strategic markets 6 to 6.5 percent.
European Industrial cap rates:
- London and South-East, low 4s. Midlands low 5s.
- Southern Europe, 6.5 to 7 percent (with a downward trend).
- Germany and Northern Europe, low 5s.
- Eastern Europe, 6.5 percent.
Japan Industrial cap rates: Low 5s, hitting high 4s. (Within Japan REIT structure, assets are actually trading at high 3s).
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