Sometimes companies can act as a canary in the coal mine for the overall economy. For example, analysts might look at statistics like the Baltic Dry Index, which is a measure of shipping prices. If prices are high, that means demand is high, which indicates a strong economy. On the other hand, if freight costs are low because there is excess capacity, it could indicate a slowdown. These things can provide clues to help investors guide portfolio decisions like whether it is time to rotate into defensive stocks or cyclicals.
The logistics space is another bellwether for the overall economy, and Prologis (PLD -7.19%) is the leading logistics real estate investment trust (REIT). What are Prologis' results saying about the overall economy?
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Prologis is a leader in the logistics space
Prologis is an industrial REIT that focuses on logistics space. The company owns 5,495 buildings and has about 1.2 billion square feet of space. If you drive down any major highway near a big city, you will almost undoubtedly see these massive structures with dozens of truck bays. These are the sort of facilities that Prologis owns, and many companies (especially retailers) keep inventory in these spaces to restock their stores.
Logistics can be a leading economic indicator
Prologis is somewhat of a bellwether for the overall economy since its business is upstream to retailers or manufacturers. Retail is especially important since consumption is the biggest component of GDP growth, If occupancy rates fall, it could mean that people are buying less in stores, so it pays to watch what companies like Prologis have to say. This could be taken as a leading indicator of falling consumption and a signal that people should take a look at their holdings of retailers, or perhaps retail REITs.
Prologis guided for occupancy to fall in 2023, so it does raise the question whether this can be interpreted as a negative signal for the economy. The company ended 2022 at 98.2% occupancy and is guiding for 2023 occupancy to fall to a range of 96.5% to 97.5%. On the fourth-quarter earnings conference call, Prologis CFO Tim Arndt put this into perspective, saying that the portfolio is 98.6% leased and that speaks to the tightness of the current market. In other words, Prologis is going from a fantastic market to merely a good one.
In fact, part of what is driving the decrease in occupancy is the delivery of new space. If there were a glut of space, we wouldn't see rapid rent appreciation. Across Prologis' markets, rent growth was 5% during the fourth quarter and full-year rent growth was 28%. The mark-to-market increase (in other words, what an existing lease would fetch it if expired today) was 67%, which is a record for the company.
The housing economy is weak, but retailing isn't as bad as the headlines suggest
The company was asked on the conference call about potential weakness and what Prologis is seeing. Prologis CEO Hamid Moghadam acknowledged the headlines regarding weaker retailers and said that the retail market isn't "super positive" but its "much better than the headlines." The only weak area Prologis is seeing is housing, and that is a function of expensive house prices and high interest rates, and not so much a reflection of the overall economy.
Prologis guided for 2023 funds from operations (FFO) to come in between $5.40 and $5.50 per share. At the midpoint this is an increase of 5.6% compared to 2022. Even though occupancy is slated to fall, increases in rent will more than offset it. At the midpoint of guidance, Prologis is trading at 22.5 times guided FFO per share. This is reasonable given the overall backdrop of the industry and Prologis' leading position. While many strategists see a recession in 2023, so far the guidance from Prologis doesn't seem to indicate it, at least not yet.
