Last year was a turbulent one for the global real estate sector. Rising interest rates increased borrowing costs, which also weighed on the value of many properties.
However, those more challenging market conditions didn't stop Prologis (PLD 2.40%) from having another strong year. The leading industrial REIT grew its core funds from operations (FFO) by 11%. That was its fourth straight year of delivering double-digit earnings growth. It has now expanded its core FFO at a 10.3% compound annual rate since the merger that formed it a dozen years ago. It's optimistic that 2024 will be another great year. Here's what's driving that positive view.
NYSE: PLD
Key Data Points
The start of the decline
Prologis' management team discussed its outlook for 2024 on their recent fourth-quarter conference call. CFO Tim Arndt commented, "We know that the market is not yet out of the woods with regards to incoming supply, but the combination of a stronger backdrop, continued low level of starts, and a calmer capital markets environment has us optimistic that 2024 will be another great year."
Arndt points out that the warehouse market is dealing with a glut of new supply. Developers started to build lots of new supply coming out of the pandemic, driven by strong demand and low interest rates. While development starts peaked in 2022 as interest rates started rising, completions won't peak until this year when those developments begin coming online:
Image source: Prologis.
It will initially take the market some time to absorb that new supply. That means vacancy rates are likely to tick up in the near term, while market rents won't grow as fast.
However, the company expects demand to start improving throughout the year. Meanwhile, higher interest rates will probably keep other developers at bay. Sprinkle in the expectations that the capital market will be calmer this year after a rash of bank implosions in 2023, and the company is optimistic it will deliver another strong year of growth.
A solid foundation for 2024
Despite some market headwinds, Prologis expects its existing portfolio to deliver strong results in 2024. The company anticipates occupancy to range between 96.5% and 97.5% this year, starting lower and gradually rising as demand improves. Meanwhile, it expects market rents to remain strong. That drives its view that its same-store net operating income will grow 8% to 9% this year. A big driver will be its ability to capture higher market rents as legacy leases expire and it signs new leases at much higher rates.
On top of that, Prologis expects to benefit from a big year of development completions. It anticipates stabilizing between $3.6 billion and $4 billion of development projects this year at strong investment yields.
Those two organic growth drivers power its view that it will grow its core FFO to between $5.42 and $5.65 per share. That's about a 9% increase at the mid-point. There's some potential upside because the forecast doesn't assume much impact from acquisitions. The REIT penciled in completing $500 million to $1 billion of property purchases this year, largely offset by dispositions ($800 million to $1.2 billion). Given its balance sheet strength, it could complete more deals this year. Last year, it made $733 million in property acquisitions and bought a portfolio from Blackstone in a $3.1 billion deal. Meanwhile, it acquired fellow REIT Duke Realty in late 2022 in a $23 billion transaction. Another sizable deal could help push the company's FFO per share into the double digits again this year.
Set up for another strong year in 2024
Despite some continued supply headwinds, Prologis is optimistic that 2024 could be another great year. The leading industrial REIT has enough embedded organic growth drivers to push its core FFO per share up by around 9% this year, with additional upside potential from acquisitions. That should enable the company to continue increasing its 2.8%-yielding dividend, which it could boost at a double-digit rate again in 2024. Those factors set the company up to potentially deliver a more than 10% total return in the coming year. That strong total return potential makes it look like a great buy right now.
