Here’s Why Prologis Sees Huge Rent Increases

As inflation continues to rage, real estate is often a great way to play it. Rising real estate prices often translate into higher rents, and Prologis (NYSE: PLD) has benefited as one of the premier players in the logistics space.

Increased e-commerce spending has helped the company, and it is now benefiting from another major corporate trend involving how much inventory companies hold. These factors have contributed to rising rents, which bodes well for Prologis’ earnings. 

Image source: Getty Images.

A leader in logistics real estate

Prologis is a logistics real estate investment trust (REIT) that is a global leader in warehousing space. The company owns and operates logistics spaces in high-barrier/high-growth markets.

If you drive along any major interstate, you will see these massive structures with what seem like dozens of truck bays. These are typical of Prologis properties. It concentrates on facilities next to major metropolitan hubs, and many e-commerce companies and brick-and-mortar retailers use these buildings to store inventory close to its final destination. 

Ever since the 1980s, corporations have focused on “just in time” inventory management, which means that inventory should be kept at low levels, which saves costs. Improvements in inventory-management software and communications helped push along this process.

During the pandemic, many companies found out the downside of this philosophy: It left them vulnerable to disruptions in the supply chain. So these companies are rethinking their inventory management and choosing to hold more of it in order to meet demand surges. This change in corporate philosophy should help drive earnings and be a tailwind for the entire sector. 

Capacity in the logistics space remains limited

Prologis just reported second-quarter earnings, which beat Wall Street expectations, and raised guidance for full-year 2022. The company is benefiting from rising real estate prices and rents, while many of its competitors struggle with rising land and construction costs.

Those higher costs mean that competitors need higher rents to earn a decent return, which makes competing with Prologis difficult. Capacity in the logistics space remains tight, and Prologis reported a 97.6% average occupancy rate for the quarter, up from the 96% average in the same quarter last year.

Look for big rent increases

Higher occupancy usually indicates a tight market, which would imply higher rental rates. During the second quarter, the company reported that its net effective rent (which takes into account promotions like a free month’s rent) rose 46%.

During the recent earnings conference call, chief financial officer Tim Arndt said that the average mark-to-market on its leases was 56%. This means that when a lease expires, the new rent will increase by about 56%. This increase will translate into over $2 billion in additional net operating income over the next several years as these leases reset to market levels, management says. 

Late 2021 and early 2022 were periods of abnormally high demand for the industry. CEO Hamid Moghadam joked on the earnings call that the end of 2021 and the first quarter of 2022 were something like a 13 on a scale of 1 to 10.

Even today, management is still assessing demand at a 9.5 to 10, which would equate to the top 5% percentile over the past 40 years. Investors have been nervous about Amazon‘s comments regarding capacity, as well as statistics that imply plenty of capacity is coming on line. As Prologis points out, though, much of this planned capacity is going to ramp up slowly as labor constraints and construction costs remain high. This should support continued growth in funds from operations. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Prologis. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Rebate Rewards

Level 2 Rebate

Deposit $2,000 and get $200 Rebate
$ 200 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $2,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $200 Rebate

Level 1 Rebate

Deposit $1,000 and get $100 Rebate
$ 100 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $1,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $100 Rebate

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex Securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Act Fast - Promotion Ends In
Click Here To Get Started
Act Fast - Promotion Ends In
Click Here For More Info