Shares of real estate investment trust (REIT) Prologis (PLD 0.11%) are down by 30% from their 2022 highs. A number of factors drove that decline, but an important one is a concern among investors that warehouse demand is softening. The company's own actions in the first quarter didn't do much to dispel that narrative.
Big and staying the same size
When it comes to REITs, Prologis is one of the giants, sporting a huge market cap of more than $110 billion even after its substantial stock price decline. It owns nearly 5,500 buildings on four continents totaling a massive 1.2 billion square feet of leasable space. Add in its investment-grade rated balance sheet and it's clear that this is a REIT with the wherewithal to make big moves, such as its $23 billion acquisition of peer Duke Realty in late 2022.
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In addition to all the warehouses the company owns, most of which are located in key global transportation hubs, it also owns developable property. From a top-level view, the company estimates that it could build $38 billion worth of projects on the land it owns. That land bank includes 6,955 acres in North America, 2,248 acres in Europe, 1,191 acres in South America, and 98 acres in Asia. This is basically internal growth that Prologis could bring online whenever it believes the time is right.
But in the first quarter, Prologis didn't make many changes to its portfolio. On the acquisition front, it bought just $6 million worth of property. On the development front, the figure was $57 million. While those numbers may seem large out of context, they are tiny for a REIT the size of Prologis.
Discipline is key
During Prologis' first-quarter earnings conference call, Chief Financial Officer Timothy Arndt highlighted that the REIT didn't do much construction, and said he thinks construction will be muted in the second quarter, too. Management is really just biding its time to make sure it has adequate demand for new properties. It's all a bit touch and go right now, in some regards.
For example, the company's occupancy rate of roughly 98% is near its all-time high. However, from a bigger-picture perspective, U.S. warehouse utilization has been trending lower of late. It's still at a high level on a historic basis, but given the direction of the trend line, it's prudent for Prologis management to be taking a more cautious approach. And, that said, the REIT is still prepared to build between $2.5 billion and $3 billion worth of warehouse space in the second half of this year. That will likely depend on market conditions since there's no particular rush for Prologis to put up buildings that will be hard for it to lease out.
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Key Data Points
On the acquisition front, Prologis is being just as tightfisted with its money. But that's a sign of the company focusing on buying only when it thinks there are good deals. When interest rates rise, as they have over the past year, property prices tend to fall to reflect the impact of the increased financing costs. That realigning of prices can be slow, however, as property owners are reluctant to reduce their asking prices, and won't until they feel enough financial distress to compel them to do so. At this point, Prologis just isn't seeing that kind of distress yet and, thus, it is sitting on the sidelines. For the full year, however, it is still targeting acquisitions of up to $600 million.
No need to rush
From a portfolio perspective, it makes complete sense for Prologis to buy and build only when and where it thinks there's a profitable reason to do so. However, there's another interesting issue in play here, given that the company was able to increase rents on expiring leases by a huge 69% in the first quarter. Essentially, the REIT's top line is likely to keep growing even while management waits. Getting bigger just to get bigger isn't a win for investors, so the slowdowns in development and acquisitions should be seen as positives. When the time is right, Prologis will likely come back strong on both fronts.
