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Key Factors to Impact Prologis (PLD) This Earnings Season

Zacks Equity Research

Prologis, Inc. PLD is slated to report first-quarter 2020 earnings on Apr 21, before the opening bell. The company’s quarterly results will likely reflect growth in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this industrial real estate investment trust (REIT) reported an in-line performance in terms of FFO per share. The company witnessed net effective rent growth in the fourth quarter, but period-end occupancy moderated slightly as it prioritized rent over occupancy.

Over the preceding four quarters, Prologis surpassed the FFO per share estimates on three occasions and met in the other, the average beat being 1.75%. This is depicted in the graph below:

Prologis, Inc. Price and EPS Surprise

Prologis, Inc. Price and EPS Surprise

Prologis, Inc. price-eps-surprise | Prologis, Inc. Quote

Let’s see how things have shaped up prior to this announcement.

Factors at Play

The industrial real estate asset category continues to play a pivotal role in a rising e-commerce market, transforming the way how consumers shop and receive their goods. Sophisticated technologies are now being employed by Industrial REITs at their logistics centers for achieving efficiency in trans-shipment and delivery process.

Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas have been witnessing solid pricing, occupancy and growth in rentals. Moreover, apart from e-retail, companies are making strategic moves to improve their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks.

Though the coronavirus pandemic resulted in a choppy situation in March, it needs to be noted that the industrial real estate category seems to be one of the most resilient ones during the crisis.

The company is anticipated to have experienced healthy demand backed by fast adoption of e-commerce. Per a recently-issued business update in light of the coronavirus pandemic, the company noted that that lease signings increased 16% year on year in March and two-thirds of this activity occurred in the second half of the month. E-commerce has been the driving force behind leasing activity, with its share being roughly 40%.

As for Prologis, the company is well poised to benefit from its capacity to offer modern distribution facilities at strategic in-fill locations. Though any robust occupancy growth is unlikely, the level is still expected to be high.

Amid these, the Zacks Consensus Estimate for first-quarter revenues is currently pegged at $850.1 million, indicating a 22% increase from the prior-year quarter’s reported tally.

Prologis is also actively banking on its growth opportunities through opportunistic acquisitions and developments. This apart, Prologis has decent balance-sheet strength to back its growth endeavors. Being a market leader, the company has the ability to raise capital at favorable rates.

The first quarter was notable in terms of acquisition deals. The company accomplished the $13-billion acquisition of Liberty Property Trust in an all-stock deal, including the assumption of debt. The acquisition strengthened Prologis’ presence in target regions, such as Chicago, Lehigh Valley, New Jersey, Houston, Central PA and Southern California.

Moreover, during the quarter, Prologis’ acquisition of the wholly-owned real estate assets of IPT reached its finale, with the former shelling out $4 billion in cash, including the assumption and repayment of debt, for the transaction. The transaction expands Prologis' presence in strategic markets across the United States, including Southern California, Chicago, the San Francisco Bay Area, Atlanta, Seattle, Dallas and New Jersey.

However, recovery in the industrial market has continued for long and a whole lot of new buildings are available in the market, leading to higher supply and lesser scope for rent and occupancy growth. Additionally, there have been concerns about the global economy and supply-chain disruptions due to the coronavirus pandemic toward the second half of the quarter. This is likely to have thwarted demand for space.

Amid these, prior to the first-quarter earnings release, there is lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of FFO per share for the March-end quarter was marginally revised downward to 81 cents, over the past week. Nevertheless, the figure suggests a year-over-year increase of around 11%.

Here is what our quantitative model predicts:

Prologis does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Prologis is -0.82%.

Zacks Rank: Prologis currently carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

SBA Communications Corporation SBAC, set to report quarterly numbers on May 5, has an Earnings ESP of +0.44% and carries a Zacks Rank of 2 (Buy), currently. You can see see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Duke Realty Corporation DRE, slated to release first-quarter earnings on Apr 29, has an Earnings ESP of +2.86% and carries a Zacks Rank of 3, at present.

Life Storage, Inc. LSI, expected to release January-March quarterly numbers around May 6, has an Earnings ESP of +0.39% and currently holds a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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