EUR 850.00 For Business Accounts Only

Morningstar | Prologis Continues to Benefit From Secular Growth

Prologis reported good fourth-quarter and full-year 2018 results, as warehousing REITs continue to benefit from e-commerce growth. Prologis’ core funds from operations came in at $3.03 per share, modestly above our expectations. This was largely due to Prologis realizing the cost synergies with DCT Industrial Trust faster than anticipated and from a 4.5% increase in same-store cash net operating income this quarter. This quarter’s occupancy and releasing spreads remained high, around 97.5% and 25.6%, respectively, which we think shows the continued immense demand for warehousing space. Although we were somewhat disappointed in the negative year-over-year growth in Prologis’ development management income, we recognize that this property management service is a relatively small part of its business. We do not intend to make a dramatic change to our fair value estimate based on our initial reaction to earnings, but we may alter it slightly as we more fully incorporate the results into our model.

Longer term, some of the factors that justify our high uncertainty rating for Prologis are playing out. First, management says it expects a decrease in occupancy, which fits into our long-term view that warehousing space is largely a commodity good and that supply will eventually catch up to balance the immense demand for this type of real estate. Second, Prologis’ fortunes are partially tied to international trade, and anti-globalist rhetoric is becoming increasingly common. An extended trade dispute between the United States and its trading partners would likely reduce the extent to which Prologis can increase rents on its tenants. That said, we agree with management that it would take some time before Prologis would start to feel the negative impacts from a trade dispute, as leases would need to be renegotiated over time.