Sometimes companies can be like the canary in the coal mine of the entire economy. For example, analysts can look at statistics such as the Baltic Dry Index, which is a measure of shipping costs. If prices are high, then demand is high, indicating a strong economy. On the other hand, if the carrying costs are low due to oversupply, it may show a decrease. These factors can provide information to help investors guide portfolio decisions such as whether it is time to switch to defensive stocks or cyclicals.
Space transportation is another bellwether for the entire economy, and Prologis (PLD 1.26%) and leading a logistics real estate investment trust (REIT). What do Prologis’ results say about the overall economy?
Prologis is a leader in the manufacturing space
Prologis is a corporate REIT focused on manufacturing facilities. The company owns 5,495 properties and has approximately 1.2 billion in real estate. If you drive down any highway near a major city, you will undoubtedly see these large buildings with lots of parking spaces. This is the case with Prologis, and many companies (especially retailers) stock items in these locations to restock their stores.
Logistics can be a leading economic indicator
Prologis is very good for the whole economy because its business is going up for wholesalers or manufacturers. Sales are very important because consumption is a large part of GDP growth, If prices are falling, it may mean that people are buying less in stores, so it pays to look at what companies like Prologis are saying. This can be taken as a leading indicator of a fall and a sign that people should look at their holdings in real estate, or perhaps real estate REITs.
Prologis revised for occupancy in 2023, thus raising the question of whether this could be interpreted as a bad sign for the economy. The company ended 2022 at 98.2% occupancy and is targeting 2023 occupancy at 96.5% to 97.5%. During the fourth quarter earnings conference, Prologis CFO Tim Arndt put this clearly, saying that the operation is 98.6% leased and speaks of the strength of the current market. In other words, Prologis is going from a very good market to just a good one.
In fact, another aspect that is driving the decline of people is the introduction of new places. If there is more space, we would not see the appreciation of the rent so quickly. Across all Prologis markets, rent growth was 5% in the fourth quarter and full-year rent growth was 28%. The increase in the market (in other words, what the same rental would take as an end today) was 67%, which is a record for the company.
The housing economy is weak, but resale value is not as bad as the headlines make it out to be
The company was asked at the meeting about the potential weakness and what Prologis is seeing. Prologis CEO Hamid Moghadam acknowledged the headlines about weak stocks and said the stock market is not “great” but “much better than the headlines.” The only area of weakness that Prologis sees is housing, and this is a function of high housing prices and high interest rates, and not a reflection of the economy as a whole.
Prologis guided for 2023 earnings from operations (FFO) to come in between $5.40 and $5.50 per share. This center is an increase of 5.6% compared to 2022. Although people are expected to fall, the increase in rent will exceed the settlement. At the mid-point of management, Prologis is trading at 22.5 times trailing FFO per share. This makes sense given the industry’s early stage and Prologis’ leading position. Although many experts see a recession in 2023, at the moment the guidance from Prologis does not seem to indicate that, perhaps not at all.