Key Takeaways: Clean quarter and +$0.02/share beat (+2.0%) relative to consensus (a penny below Hedgeye) with a larger FY21 guidance range relative to 1Q21 results driven by promote income. The beat is modest but the forward-looking metrics indicate an accelerating ROC and longer tail on NOI growth, which is why we placed PLD on our Long Bench. If the stock were to correct meaningfully for whatever reason it would easily make it to the high conviction list over a tail duration:
- Reported in the press release (versus the call typically, highlighting the importance of the number), that in-place mark-to-market was up to +17% globally versus +13.6% as of 1Q21 - a +340bp move sequentially is a HUGE move and speaks to the velocity with which market asking rents are accelerating to the upside. It also effectively elongates the tail for above-average NOI growth looking out into the future. As we spoke about HERE, the low-3% implied cap rate is really just reflective of the increased probability that higher "stabilized" yields are on the come and arrive sooner due to accelerating rents. For example, if PLD were to grow NOI by 5%+ compounded over the next 5 years, the stabilized yield on cost could approach a 5 handle before leverage
- This ignores the earnings growth and contribution from Strategic Capital as well as the virtuous cycle of development/contribution into the platform - for these reasons we believe investors should focus on earnings growth and the rate-of-change when thinking about PLD, as focusing on the cap rate alone would miss "turning $1.00 into $1.25"
- PLD took the range on Core FFO up +1.8% sequentially at the midpoint (versus +1.5% last quarter), and Core FFO excl. volatile promote income +70bps versus +1.5% last quarter - aka most of the raise comes on ~$0.02/share positive of expected net promote versus a ~$0.02/share drag previously. FY21 Core FFO excl. promotes is now expected in the range of $4.02 to $4.06, and we were at $4.06 coming into the quarter. We view the guidance as conservative and expect the range to continue to move up through the balance of FY21
- PLD increased the size of the land bank to now support ~$18 billion of development capacity versus ~$17 billion previously. Interestingly expected yields compressed by ~10bps down to 5.7%, most likely on the addition of $1 billion land at significantly higher per acre costs. If rents keep accelerating and moving higher, however, we would expect these yields to also prove conservative and move higher ahead of eventual delivery. There is little incentive to over-promise and under-deliver
- Below is our variance table on 2Q21 results, which were essentially right down the middle. We were a little high by about $0.01/share on FFO contribution from other unconsolidated ventures which results in our Core FFO estimate of $1.02 versus $1.01 actual.
Figure 1: 2Q21 Variance Table
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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