Key Factors to Impact Prologis (PLD) This Earnings Season

Prologis, Inc. PLD is slated to report third-quarter 2020 earnings on Oct 20, before the bell. While the company’s quarterly results will likely reflect growth in revenues, the funds from operations (FFO) per share might display a decline.

In the last reported quarter, this industrial real estate investment trust (REIT) delivered a surprise of 12.12% in terms of FFO per share. The better-than-expected performance was driven by decent growth in rental income. Occupancy level was also healthy.

Over the preceding four quarters, Prologis surpassed the FFO per share estimates on three occasions and met in the other, the average beat being 4.72%. 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


Let’s see how things have shaped up prior to this announcement.

Factors at Play

The industrial real estate category has been one of the most resilient ones amid the coronavirus pandemic. The social distancing requirements have particularly prompted order of more goods online. Moreover, apart from e-retail, companies are making strategic moves to boost their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks.

Per a report from Cushman & Wakefield CWK, despite the pandemic, the industrial real estate market has been on its growth trajectory backed by tailwinds, including the e-commerce boom. There has been absorption of 62.1 million square feet (msf) of space in the third quarter, marking the strongest quarter so far this year, while new leasing activity exceeded 100 msf for 19 straight quarters, and reached 155.2 msf. This reflects the rise in digital sales, bringing e-commerce leasing together with third-party logistics providers, which helped warehouses/distribution spaces.  

Tighter market conditions and solid demand supported rent growth during the September-end quarter, with U.S. industrial asking rents increasing 2% year over year to $6.63 per square foot. While the U.S. industrial vacancy rate in the quarter came in at 5.3%, reflecting a slight increase, vacancy rates have been low (below 3%) in the tightest markets. In addition, the current construction industrial pipeline has reached a new record high for the market to 340.9 msf.

Amid these, Prologis is well poised to benefit from its capacity to offer modern logistics facilities at strategic in-fill locations.The company is anticipated to have witnessed healthy demand on the fast adoption of e-commerce, with leasing activity getting a support in the to-be-reported quarter. Though any robust occupancy growth is unlikely, the level is still expected to have been high.

Apart from these, the company’s expansion efforts, through acquisitions and developments, in recent years are likely to have boosted the top line in the quarter under review. Furthermore, Prologis has decent balance-sheet strength to aid its growth endeavors and is expected to have again taken up such efforts in the July-September period. Being a market leader, the company has the ability to raise capital at favorable rates and is likely to have maintained financial strength with liquidity during the period in discussion.

Amid these, the Zacks Consensus Estimate for quarterly revenues is currently pegged at $957.6 million, suggesting a 34.8% year-over-year jump.

However, with the asset category being an attractive one in the current challenging times, there is a development boom in some markets. This high supply is likely to have intensified competition and curbed pricing power.

Additionally, though industrial real estate fundamentals seem more resilient than other asset categories, these are not immune. The current slowdown in the economy is likely to have affected demand for space in some markets in the quarter to be reported. Rent relief and deferrals might have been an issue as well, specifically, for the company’s smaller tenants that have been adversely impacted by the pandemic.

Prior to the third-quarter earnings release, there is lack of any solid catalyst for being optimistic about the company’s business activities and prospects. The Zacks Consensus Estimate for the third-quarter FFO per share remained unrevised at 88 cents over the past month. The figure also suggests a year-over-year decrease of 9.3%.

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 0.00%.

Zacks Rank: Prologis currently carries a Zacks Rank of 3 (Hold).

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:

EastGroup Properties, Inc. EGP, slated to release third-quarter earnings on Oct 27, has an Earnings ESP of +0.80% 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.

National Storage Affiliates Trust NSA, scheduled to report quarterly numbers on Nov 5, currently has an Earnings ESP of +2.44% and carries a Zacks Rank of 2.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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