On its recent fourth-quarter earnings call, management from logistics real estate giant Prologis Inc. said strong demand from the second half of 2020 has continued into the new year.
“We entered 2021 with optimism and confidence,” commented CFO Tom Olinger.
The positivity stems from broad demand from the bulk of its customer base, with only hospitality suppliers struggling. Verticals touching consumer products, food and beverage, electronics, and health care are thriving. Management pointed to a “powerful economic recovery,” which includes the best GDP forecast in the past two decades, high levels of corporate and personal savings and future stimulus payments as reasons to be excited about 2021.
The San Francisco-based company issued favorable 2021 guidance of $3.88 to $3.98 per share in core funds from operations, ahead of the current consensus estimate of $3.83. New development starts are expected to be in a range of $2.3 billion to $2.7 billion for the year.
The surge in need has been accelerated by the pandemic with e-commerce leasing increasing 19.8% in the quarter as retail, third-party logistics and transportation companies flocked to the market to find space for the holiday shipping season. Surging container imports in efforts to replenish depleted supply chains and a 45% year-over-year spike in online holiday buying during the November and December period have been drivers for new demand.
E-commerce requires up to three times the space that traditional retail distribution operations need. Prologis estimates increased e-commerce fulfillment will require 200 million square feet, or more, of incremental space over the next several years. Additionally, the company estimates that many supply chain managers will look to increase leased square footage to take on incremental inventory to avoid future stockouts. A 5% increase in inventory levels would require an additional 300 million square feet in the U.S. alone.
“The pandemic has pushed global supply chains to their limits. Increased e-commerce adoption and the rebuilding of inventories to meet consumer demand are structural forces in the logistics environment that will take years to play out,” said Prologis Chairman and CEO Hamid Moghadam in the press release.
Prologis reported fourth-quarter core FFO of 95 cents per share, 3 cents ahead of consensus. Full-year 2020 core FFO climbed 15% higher year-over-year at $3.80 per share. Revenue increased 35% year-over-year to $1.1 billion in the quarter, in part due to acquisitions. Prologis inked $17 billion in closed M&A deals in 2020.
Occupancy fell 70 basis points to 95.8%, partly due to a lack of inventory in the system. The company signed leases representing 65 million square feet in the quarter, a new record. Rents grew by 3.2% and management’s guidance calls for a 5% increase in 2021, with last-touch and gateway distribution markets in the U.S. leading the increase.
U.S. net absorption, the amount of space leased over that vacated, was a record at 100 million square feet in the quarter. The valuation of Prologis’ logistics portfolio increased 5% sequentially and is now 6% higher than pre-pandemic levels. Management believes the value of the real estate increased by $7 billion in the fourth quarter.
Prologis ended the year with $4.2 billion in available credit and $598 million in cash. Including open-ended funds and $3 billion of liquidity at co-investment ventures, Prologis has more than $13 billion in investment capacity. The company’s debt-to-market capitalization ratio was 20% at year-end. Shares of PLD were up more than 3% on the day compared to the S&P 500, which is flat.
Prologis’ industrial real estate portfolio includes almost $150 billion in total assets under management. The company’s nearly 1 billion square feet of owned and managed properties spans 19 countries, serving 5,500 customers. Many of its warehouses in the U.S. service ports on both coasts, regional distribution hubs, and rail and intermodal facilities. Roughly $2.2 trillion in goods, or 2.5% of the world’s GDP, move through a Prologis facility each year.