Prologis to keep pushing rents up 'pretty hard' even as occupancy falls

By Tomi Kilgore

Logistics real-estate company's stock turns lower as drop in occupancy offsets earnings beat

Shares of Prologis Inc. sank Tuesday, after the fulfillment-center real-estate company reported a disappointing drop in second-quarter occupancy as it plans to keep pushing "pretty hard" to raise rents.

The occupancy weakness, which the company expects to continue, offset profit and revenue that rose above expectations and a raised full-year earnings outlook.

The stock (PLD) dropped 3.1% Tuesday, reversing an early intraday gain of as much as 1.4%.

The company reported average occupancy of 97.5% in the second quarter, down from 98.0% in the first quarter and below the 97.6% rate in the same period a year ago.

The company said it expects vacancies to keep rising, with a projected 2023 occupancy rate of 97.0% to 97.5%.

This decline could be partially blamed on rising rents.

Chief Financial Officer Tim Arndt said on the post-earnings conference call with analysts that in-place rents, or rents in lease agreements, increased 2.5% from the pervious quarter, which puts the forecast for global full-year rent growth at 7% to 9% on a global basis.

Chris Caton, managing editor of global strategy and analytics, added on the call that as the company continues to "push rents pretty hard," he'd be happy to see occupancies "a bit lower" than 98%.

The company tracked the number of leases that were lost because of how hard it pushed to raise rents, to figure out the tradeoff between rents and occupancy, and Caton noted that results were as planned.

"So we did see as a result of our efforts an uptick in basically the percentage of deals lost due to price," Caton said, according to an AlphaSense transcript. "It went up from about 10% to about 20%, which is kind of where we'd like to have it."

Prologis' stock has gained 10.0% year to date, while the Real Estate Select Sector SPDR exchange-traded fund (XLRE) has edged up 3.3% and the S&P 500 index has rallied 18.6%.

-Tomi Kilgore

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07-19-23 0721ET

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