Prologis Inc. (NYSE: PLD), the world’s leading logistics real estate investment trust (REIT), said 24% of its customers have inquired about rent releases and deferring payments in response to the COVID-19 pandemic, which has stunted demand for goods in many industries.
On a business update call with analysts and investors earlier this week, the company said the release requests total 69 days of rent relief on 16.6% of the company’s portfolio. Prologis expects to grant deferrals in the form of a repayable loan to roughly one quarter of those that have sought relief. Management estimates the deferral loan amounts will equal 1% of the company’s gross annual rent.
Of note, management said some of the inquiries have come from large, “financially sound” clients that are looking to take advantage of the current market in which some landlords are offering accommodative rent payment solutions.
Prologis Chairman and CEO Hamad Moghadam said they are seeing a “significant spike in short-term demand” primarily led by e-commerce.
In March, e-commerce-related demand accounted for 40% of new leases for Prologis. The company normally sees this sector accounting for 23% of newly inked deals. Space needed to fulfill demand for essential daily needs like general retail, food, medical supplies and the industries that facilitate the delivery of these products — such as paper, packaging and transportation — is in high demand.
Not surprisingly, the market for hospitality and brick-and-mortar retail real estate is struggling.
The company signed 209 leases for 18.5 million square feet in March, up 16% year-over-year on an adjusted basis. Management said 64% of those deals came in the second half of the month as mandated lockdowns and shelter-in-place decrees spread. Short-term leases of less than one year in duration were up 44%, with leases greater than a year increasing 12%.
A forward-looking metric, lease proposals, climbed 13% year-over-year in March, increasing 29% in the 10-day period ended April 3.
Moghadam said the “short-term surge in demand is real,” but noted that it may not be sustainable.
Prologis received 94% of March rent payments, which was actually up year-over-year.
While management didn’t provide an update on first-quarter earnings results, they did offer a framework of what the downturn might entail. They said default rates climbed from 21 basis points to 56 basis points during the global financial crisis and could reach the 100-basis point level during the current crisis “for a period of time.”
However, they see several mitigating circumstances this go-round. The logistics real estate market entered the financial crisis with lower utilization and an 8%-plus vacancy rate that grew to more than 13%. The current crisis began with the market at a 4.5% vacancy rate.
Additionally, management sees other favorable fundamentals that bode well for the industry. These include the acceleration and further adoption of e-commerce; the fact that many sectors already need additional real estate; the banks being in a much better position to help their clients; and an “unprecedented” amount of public financial support.
Further, management believes that many supply chains, which suffered a supply shock as mass quarantines and lockdowns were enforced, will not want to find themselves in a thin inventory position in the future. Management sees as much as a 5%-10% increase to “safety stock” moving forward, which they believe is very significant for an industry that grows in the 1%-1.5% range annually.
Prologis Chief Investment Officer Gene Reilly said the industry is entering this crisis with the “healthiest logistics real estate market fundamentals on record.” Commenting on Prologis’ financial health, Reilly said the company has the “highest-quality portfolio and the strongest balance sheet we have ever had.”
Prologis has $4.6 billion in cash and credit line capacity along with $3.6 billion in open-ended funds that are only 21% leveraged. During first-quarter 2020, the company refinanced $5.1 billion of debt with an average term of 13 years and an average rate of 1.9%. This cleared almost all its expiring debt maturities through 2021.
Prologis has combined investment capacity of more than $10 billion.
The company has halted all new speculative projects, including the construction on some projects that have already started. The cost to complete its share of the project portfolio is $1.9 billion over the next 12 months.
Asked about pushing portfolio growth into the downturn, management said they will “make opportunistic investments” but will remain “patient.”
Since the pandemic started, Prologis has donated 450,000 square feet of space, with a total of 5 million square feet allocated to various COVID-19 relief organizations throughout the world.
Prologis will report first-quarter 2020 earnings on April 21.
