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Key Factors to Impact Prologis (PLD) This Earnings Season

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Prologis, Inc. PLD is slated to report fourth-quarter and full-year 2019 earnings on Jan 22, before the opening bell. The company’s quarterly performance is likely to reflect growth in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this industrial real estate investment trust (REIT) delivered a positive surprise of 4.3% in terms of FFO per share. The company witnessed rent growth in the quarter, but period-end occupancy moderated slightly as the company prioritized rent over occupancy.

Over the preceding four quarters, Prologis surpassed the FFO per share estimates on all occasions, the average beat being 2.07%. This is depicted in the graph below:

Prologis, Inc. Price and EPS Surprise

Prologis, Inc. Price and EPS Surprise

Prologis, Inc. price-eps-surprise | Prologis, Inc. Quote

For full-year 2019, Prologis guided core FFO per share in the range of $3.30-$3.32, year-end occupancy at 96.5-97.0%, and same-store net operating income (NOI) - cash (Prologis share) of 4.75-5.0%.

The Zacks Consensus Estimate for the fourth-quarter FFO per share is 84 cents and for the full year is $3.30.

Let’s see how things are shaping up for this announcement.

Factors at Play

The industrial real estate asset category has grabbed headlines and continues to play a pivotal role in a rising e-commerce market, transforming the way how consumers shop and receive their goods. Sophisticated technologies are now being employed by Industrial REITs at their logistics centers for achieving efficiency in trans-shipment and delivery process.

Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals. Furthermore, demand for distribution space has been rising, as e-commerce continues to expand to sectors like grocery and furniture. Also, apart from e-retail, companies are making strategic moves to improve their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks.

Per a report from Newmark Knight Frank, the robust demand has continued to push pricing higher, while the vacancy rate hovers near the cyclical low. Particularly, at fourth-quarter 2019, average industrial asking rent across the U.S. measured $7.41 per square feet, denoting 4.5% year-over-year as well as the highest quarterly average recorded this cycle. Vacancy rate too remains low at 5.2% at the end of 2019, however, expanded 10 basis points from the prior quarter and 30 basis points, year on year. Nevertheless, vacancy has been very tight in a number of key markets.

As for Prologis, the company is well poised to benefit from its capacity to offer modern distribution facilities at strategic in-fill locations. Its large number of build-to-suit development projects highlights the advantageous location of its land bank, as well as demand from multi-site customers, many of whom are focused on e-commerce.

In the to-be-reported quarter, the company is likely to have continued to prioritize rent over occupancy. Therefore, rent growth is likely to have been comparatively remarkable. Though any robust occupancy growth is unlikely, the level is still expected to be high.  

Amid these, the Zacks Consensus Estimate for the fourth-quarter revenues is currently pegged at nearly $726.7 million — indicating 7% increase from the prior-year quarter’s reported tally — which is encouraging.

Prologis is also actively banking on its growth opportunities through opportunistic acquisitions and developments. This apart, Prologis has decent balance-sheet strength to back its growth endeavors. Being a market leader, the company has the ability to raise capital at favorable rates.

Particularly, the fourth quarter was notable in terms of announcement of acquisition deals. In October, the company announced the acquisition deal of Liberty Property Trust LPT in an all-stock transaction, valued at $12.6 billion, including the assumption of debt. The acquisition, which is anticipated to close in the current quarter, will cement Prologis’ presence in target regions such as Chicago, Lehigh Valley, New Jersey, Houston, Central PA, and Southern California. Moreover, this industrial REIT opted for expansion of its development venture in China. The company raised its development capacity to more than $3.5 billion.

Nonetheless, recovery in the industrial market has continued for long and a whole lot of new buildings are becoming available in the market, leading to higher supply. Also, there have been concerns about the global economy and the trade war with China.

Amid these, prior to the fourth-quarter earnings release, there is lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of FFO per share for the December-end quarter remained unchanged at 84 cents, over the past 30 days. Nevertheless, the figure denotes a projected year-over-year increase of around 5%.

For the full year, the Zacks Consensus Estimate for FFO per share marginally moved south to $3.30 over the past month. Nevertheless, the figure indicates an 8.9% increase year on year.

Here is what our quantitative model predicts:

Prologis does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Prologis is -1.04%.

Zacks Rank: Prologs currently carries a Zacks Rank of 2 (Buy), which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

SL Green Realty Corp. SLG, slated to release fourth-quarter earnings on Jan 22, has an Earnings ESP of +0.35% and carries a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rexford Industrial Realty REXR, expected to release October-December quarter results around Feb 11, has an Earnings ESP of +4.17% and currently holds a Zacks Rank #2.

Camden Property Trust (CPT - Free Report) , set to report quarterly numbers on Jan 30, has an Earnings ESP of +3.75% and carries a Zacks Rank of 2, currently.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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