A Prologis facility in Tracy, CA; the REIT's shares have been upgraded by Capital One analysts. (Photo courtesy of Big-D Construction)
McLEAN, VA—Industrial REITs look generally strong going into third-quarter earnings season, which begins Thursday morning with Prologis, write Capital One Securities analysts in an industry note. That being said, the analysts note some near-term moderation of growth in fundamentals across the markets they surveyed.
Analysts Thomas J. Lesnick, Ryan Wineman and Chris Lucas surveyed the Houston, Atlanta, Southern California, Bay Area and Chicago industrial markets using data from CoStar Group and Real Capital Analytics. Broadly speaking, they write, cap rates in those markets “continued to trend flat” on a quarter-over-quarter basis, with the exception of Inland Empire and San Francisco, both of which ticked up slightly.
Metrics on pricing per square foot were mixed in the Capital One analysts' survey. “Occupancy was flat to down across most markets, except for the Bay Area,” they write. “Asking rates continued to trend higher in every market we surveyed. But asking rent growth moderated year over year in Atlanta and Inland Empire.”
Across all of the markets the analysts surveyed, deal volume also was mixed. During Q3, according to their report, “Leasing volume slowed across all five markets we surveyed; however, available space has continued to trend lower and some transactions may not have posted yet.”
Longer term, industrial supply nationally is projected to grow at 3.2%, roughly in line with demand at 3.3%. “By market, demand growth is currently anticipated to outpace supply growth in many major markets,” according to Capital One's analysts. However, that's not invariably the case, they note: “Demand is projected to outpace supply in Kansas City, the DC metro and Phoenix over the next two years, while supply is projected to outpace demand significantly in Dallas, St. Louis and Atlanta.”
Industrial REITs lately have traded at a bigger premium to the REIT sector as a whole in terms of present net asset value. While over the past three years the premium has been 2.6%, today shares trade at an 8.6% premium based on P/NAV; the premium has averaged 9.8% since June.
“After robust outperformance over the summer, which we attributed to increased activity by generalists who were placing more emphasis on e-commerce and multiple valuation relative over NAV, industrial shares have pulled back in the last few weeks,” according to Capital One's analysts. Since Sept. 1, they write, the SNL Industrial REIT Index has fallen 6.1%, underperforming the RMS by 34 basis points. “Despite the pull-back, shares of industrial REITs still don't appear cheap,” they write. However, “we view valuation as more fair given the sector's robust operating fundamentals and growth prospects.”
On the eve of earnings season, Capital One's analysts have upgraded both Prologis and DCT Industrial Trust to equalweight. Earlier this month, they upgraded Liberty Property Trust to overweight, “increasing our price target by $1 to $41 on the closing of a meaningful, long-awaited portfolio sale.” They did the same for Stag Industrial Inc. on the strength of a strong acquisition pipeline.
Capital One's analysts are forecasting core funds from operations of 66 cents per share for Prologis, a penny below the consensus. They're in line with consensus on full-year FFO of $2.56 per share, though. For DCT, their earnings forecast on both Q3 and FY 2016 is in line with consensus at 55 cents and $2.19, respectively.
For LPT, the analysts are estimating 66 cents per share, in line with the consensus on Q3 earnings; their FY estimate of $2.33/share is at the lower end of the $2.30-$2.40 guidance. Stag is expected to report core FFO of 39 cents per share for Q3 and $1.57 for FY16. Rexford Industrial is seen as likely to report estimate 22 cents per share on core FFO, one cent above consensus. “FY16 guidance is $0.85 – $0.88; we are at $0.87, in line with the midpoint and $0.01 above consensus,” according to Capital One's analysts.
The industrial sector has become the hottest segment in commercial real estate. How will logistics companies keep up with the market forces of omnichannel commerce? When will new supply finally catch up with demand? Who's putting investment capital into industrial and what does the future hold? Join us at RealShare Industrial on November 16 and 17 for answers to these and other questions. Learn more.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
