The financial news from Prologis about its second quarter of 2023 was largely glowing, and one of the important reasons was a strong performance on rents.
Net diluted earnings per share hit $1.31 compared to $0.82 for the second quarter of 2022, a 60% increase. The company upped its 2023 guidance from between $3.10 and $3.25 net earnings per diluted share for the year to $3.30 to $3.40, a 5.5% increase.
Expected average occupancy remained at 97% to 97.5% while cash same store NOI went from a 9% to 9.75% range to 9.5% to 10%.
“We had a very good quarter with outstanding results across our uniquely diversified business,” CFO Tim Arndt said during the earnings call. “It was highlighted by record rent change, a ramp-up in development starts, roughly half of which were build-to-suit, and the acquisition of over $3 billion of real estate at accretive returns, deepening our scale in key markets.”
At a time when many in CRE have worried about the staying power of virtually every property segment, this REIT saw rising rents drive growth.
“Rent change on starts was a record on both a net effective and cash basis, 79% and 48%, respectively,” Arndt said. “Net effective rent change on signings of more forward-looking view was an impressive 87% with notable rent change from Phoenix at 137%, Northern New Jersey at 150%, and Southern California at 181%. Global markets also contributed to strong signings with Mexico at 34%, the U.K. at 36%, Central Europe at 51%, and Canada at 150%. Bottom line, rent change has been both robust and broad-based.”
Market rents were up, though at slower pace of 1.5% during the quarter. In-place rents were up 2.5%, “the net of which translates to a lease mark-to-market of 66%, down from 68%.”
Same-store growth was 8.9% on a net effective basis and 10.7% on cash.
For all that, Prologis has reduced its rent growth forecast in Southern California because vacancies have grown in part because port operations aren’t yet back to normal. Also, some customers are diversifying their warehouse needs across other Southwest markets rather than continuing to concentrate on the Inland Empire. But they expect rent growth to increase in other markets, like Las Vegas, Texas, Mexico, and Europe.
“All of this together with the more than 5% rent growth to date has us reforecasting the full year to a range of 7% to 9% on a global basis,” Arndt said. “What matters more than what will transpire in the next six months is what we see over the medium term, which is growth that will be fueled by escalating replacement costs, growing barriers to new supply and ongoing secular drivers of demand.”
Chairman and CEO Hamid Moghadam added in response to a question that “we mentioned to you last quarter that we would be continuing to push rents pretty hard and would like to see occupancies a bit lower than 98%. So, what you’re seeing is consistent with what we’re planning to do and actually we accomplished what we wanted to do in that we track the number of leases that we lose because of price and how hard we’re pushing, and we modulate around that to figure out the trade-off between rents and occupancy.”