10/17/21 03:45 PM EDT

SUNDAY NIGHT REIT READ | 10.17.21 | (PLD, POSITION MONITOR)

Rob Simone, CFA

Takeaway: Key takeaways from PLD 3Q21 earnings call

Following PLD's kick off to 3Q21 earnings season + ahead of the investor day tomorrow, we wanted to call out the key takeaways from the earnings call on Friday (which we had to catch up on as we were on the road):

The +22% portfolio-wide mark-to-market (up from ~18% last quarter) is expected to further increase over 4Q, reinforcing the outlook for further market asking rate growth on top of the +7.1% y/y growth achieved in 3Q in PLD's markets. Market rents for warehouse in FY21 are now expected to grow +19% y/y in the U.S. and +17% globally. Perhaps as a second-order effect, promotes coming out of the SC platform are expected to "expand exponentially" going forward. As a reminder, the promotes are split between management/shareholders, and the reported promotes come after management's cut.
Pre-leasing in the delivery pipeline reached ~70%, the highest level ever achieved. Spaces >100ksf are effectively fully leased, and with vacancies at unprecedented lows space in PLD's markets is effectively sold out.
Forecasts 2021 U.S. net absorption +14% higher to a record ~375msf versus deliveries of ~285msf, resulting in year-end vacancy at just ~4% which is essentially the tightest the market has ever been. Investors will recall that the market had been roughly in balance to slightly favoring net absorption (at ~200-300msf per annum) for years leading up to 2020-2021.
Regarding supply chains, given PLD's unique positioning and role:

In the last 90 days, the supply chain issues have become much more pronounced, with customers acting with a sense of urgency to secure warehouse/logistics space needed. The issues "are not just cost, they are also scheduling-related."
The supply chain is "very long and has gotten longer over the last 10 years... we turned off the hose and the hose ran dry. Now we turned it back on, and the old models for predicting demand and carrying inventory are basically thrown out the window. So inventory, particularly mid-product inventory, not finished-product inventory, sort of ends up piling up in different places. If there is one part of the 99 parts missing into something, its going to hold up the inventory."
This part of the problem is temporary/transitory, but "probably a 2-3 year type of process before everything straightens out."
Two other factors, increased share of e-commerce and higher structural inventory levels post-pandemic, aren't even being thought about right now as people are just trying to keep their heads above water. Short-term the former issue is creating the headlines, but longer-term these two factors are much more interesting for PLD's business fundamentals.
PLD itself is seeing delays and longer lead times in procuring critical items for their own projects as OEM manufacturers continue to struggle, such as with forklifts, racking, etc.
With the labor issues continuing and becoming more pronounced, PLD's customers are increasingly looking into automation such as robotic/autonomous forklifts. The most critical aspect in facilitating tenant automation is good floor configuration, and PLD is very-well positioned here versus a COLD, for example, with older physical plant.
As a broad reference point, portfolio wide rent represents ~5% of supply chain cost for PLD's customers and supply chain is ~5% of revenue, so rent represents just ~25bp of revenue/throughput distribution. With the rapid increase in labor and transportation costs, that number has actually gone down a bit over the last 12-18 months, perhaps increasing the propensity for customers to pay higher rent and save on cost elsewhere in their cost structure.