Certain companies are often good indicators of the overall health of the economy. For example, large retailers can often report strength in consumer spending, which is the largest component of gross domestic product (GDP). Although not a retailer, Prologis (PLD 1.77%) is another type of business that takes the pulse of the national economy. The company has just published its third quarter results and has withdrawn its forecast for 2022. Is this a wake-up call for the economy?
Prologis is one of the leaders in the logistics industry
Prologis is a logistics real estate investment trust (REIT), serving all kinds of customers, from retailers to manufacturers. If you drive along any of the major highways near major cities, you’ll see all sorts of massive warehouses with dozens of truck bays. Prologis has 4,914 buildings, with approximately 1 billion square feet. Although Prologis has a global presence, the United States accounts for approximately 82% of the company’s net profit.
The COVID-19 pandemic has been a wake-up call for many businesses and retailers that have been following a lean inventory management policy. Extended supply chains allow businesses to operate more efficiently; however, this makes them vulnerable to shocks. COVID-19 was one such shock. Retailers were left with empty shelves and manufacturers had to suspend production to wait for parts. In the aftermath, companies have sought more storage space for inventory to avoid further supply chain disruptions.
FedEx and Amazon are slowing their expansion
That was then. During the earnings conference call, Chief Financial Officer Tim Arendt said “some customers have publicly announced a pause in capital spending, particularly those with more mature supply chains.” It refers extensively to Amazon.co.uk and fedex, who announced they were slowing the pace of warehouse space leasing. If flagship companies like these two reduce their investments, it could be a wake-up call for the economy.
Prologis CEO Hamid Moghadam put things into perspective on Amazon and FedEx, saying Amazon was “on a tear” in 2020 and 2021, and “they [Amazon] probably too engaged in space, and they just backed off a bit. He also noted that none of Prologis’ leases are affected by Amazon’s decision. He mentioned that FedEx was consolidating some of its airport operations and Prologis may end up being the beneficiary. Amazon and FedEx decisions may be a negative indicator for the economy, they will not be a problem for Prologis.
The general economic environment is difficult
Overall, the macroeconomic environment is experiencing headwinds given the Fed’s consistent pattern of raising the fed funds rate by 75 basis points (0.75%) over the past few months. Monetary policy tends to affect the economy with a lag, so much of this tightening hasn’t had a chance to work yet. That said, Prologis’ activity seems to be holding up, with an occupancy rate of 97.7% and an increase in net effective rent of nearly 59.7%, a record for the company.
That said, the company cut its base funds from operations (FFO) projections from a range of $5.14 to $5.18 to a range of $5.12 to $5.14. In the press release, Chief Financial Officer Arendt said the company was “more confident than ever in the resilience of our business, we are exercising caution in the near term…As a result, we are taking a more conservative approach in how we choose to allocate our capital, and therefore lower our forecast for housing starts, disposals and contributions while closely monitoring the market.” This is a cautionary tale about the economy, especially as it heads into the fourth quarter.
Prologis is trading at 21.4 times its estimated 2022 FFO per share, which is about reasonable for a market leader in a rising rate environment. The annual dividend of $3.16 is more than amply covered by the FFO forecast, and at current levels the stock is yielding 2.7%. Prologis will continue to benefit from the longer-term evolution of the company’s inventory management and the demand for space remains strong. The reduced FFO estimate probably makes sense in the current economic environment. Holiday retail spending will tell us a lot about the state of the economy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, FedEx and Prologis. The Motley Fool has a disclosure policy.