Prologis Reports Record Profits on Surging Warehouse Demand

Prologis Inc., the world's biggest warehouse owner, on Tuesday reported record profits in the second quarter, as near-record occupancy rates drove up rents.

The company reported funds from operations—the benchmark for measuring profits of real-estate investment trusts—of $324 million, or $0.60 a share, beating the average analyst estimate by a penny. Revenue rose 18% year-over-year to $602 million.

Demand for warehouses has run out ahead of new construction for years in the U.S., as retailers expand distribution networks to position goods for faster delivery of online orders to customers. Vacancy rates are below 5% in some major cities, and have been falling nationwide since the end of the recession. Even as rents rise, large warehouse owners like Prologis have been reluctant to build new space without a customer lined up for fear of flooding the market.

"The main reason for the markets being as positive as they are is that development has been constrained….and demand continues [to grow] at a decent pace," said Hamid Moghadam, the company's chief executive. "It drives down vacancy rates and gives landlords pricing power."

Prologis cut its anticipated 2016 construction budget in the first quarter to below last year's amount. The company on Tuesday raised its planned spending on new projects, with Mr. Moghadam citing strong demand from customers looking for custom "build-to-suit" warehouses. The new projection is for $2 billion to $2.3 billion in development starts, up from $1.8 billion to $2.3 billion in previous guidance.

Rents on lease renewals jumped 17.8%, up from a year ago, although that was down from an all-time high of 20.1% in the first quarter. In the U.S., the renewal rents soared 23.5%.

The U.K.'s vote to exit the European Union isn't likely to affect demand for warehouses, Mr. Moghadam said. Though the breakup could reduce economic growth, any move away from a common market will increase the need for international retailers and manufacturers to store goods in both the U.K. and continental Europe, he said.

"From an operational point of view it will have virtually no impact one way or another," he said. He added that property developers could find it easier to borrow in the U.K. post-Brexit if interest rates fall in response to worsening economic prospects.

Prologis shares were down 0.3% at $51.46 in early afternoon trading in New York.

Write to Brian Baskin at [e-mail]

(END) Dow Jones Newswires

July 19, 2016 14:05 ET (18:05 GMT)

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