Prologis’s CEO: ‘We are really being picky about what we buy’

At a time of elevated macroeconomic and geopolitical uncertainty, Prologis is targeting higher returns from potential deployment opportunities.

When it comes to acquiring assets, “we are even pickier than we have been with respect to the quality and fit with our portfolio,” chairman and chief executive Hamid Moghadam said during the firm’s Q3 earnings call. “Before, you had to buy the good with the great in portfolios, and we had to go through the massive exercise of disposing properties that we didn’t want, which we did actually quite successfully in a declining cap rate environment, and we actually made money on it. But we don’t expect that to be the case going forward. So we’re really being picky about what we buy.”

Moghadam added that the firm has now raised its return threshold for acquisitions, focusing on properties that can yield unleveraged internal rates of return of 9 percent to 9.5 percent. He explained that treasury yields have risen 300 basis points to 4.5 percent, so core properties that were trading in the high 5 percent to low 6 percent IRRs now have to generate a 9 percent unleveraged IRR.

He also added that Prologis was seeing more of these higher-return investment opportunities come to market and expected more transactions in the next six months.

“We get a sense that there is going to be more opportunities coming our way, and it is in a capital-constrained environment,” Moghadam said. “And we happen to be in the fortunate position of having a really good balance sheet… I think the opportunity set is going to exceed the available capital, and I think we’ll be taking advantage of that.”

In June, the firm made a major warehouse purchase when it agreed to acquire nearly 14 million square feet of industrial properties from Blackstone in an all-cash deal of $3.1 billion. In addition to this deal, the firm’s 2023 guidance projects $500 million to $800 million in total acquisitions for the year.

During the earnings call, Tim Arndt, the firm’s chief financial officer, also highlighted the acquisition of $118 million of land including a strategic area in Las Vegas, which will build out an additional 10 million square feet over time, bringing the firm’s total build-out of land globally to over $40 billion.

Moghadam saw potential deployment opportunities arising from merchant developers that are now completing their projects but have lease-up plans that are being extended. “I think what’s going to happen is that they can’t really afford to rent the space at the lower rate,” he said. “I think they’re more likely to sell their positions to people with stronger balance sheets. And we’ve already seen and taken advantage of a couple of instances like this. So don’t be surprised to see us buy some vacant completed sheds at discounts to replacement costs because of our view on demand and supply.”

Middle East impact

Fed rate hikes and ongoing geopolitical volatility, including the turmoil in the Middle East, are expected to impact logistics demand. According to Arndt, continued hawkishness from central banks and its impact on interest rates is causing companies to delay decision making and become less willing to take expansion space early.

Meanwhile, Moghadam believed the Israel-Hamas conflict would have an indirect impact on demand because the Middle East is neither a source of products or exports, nor a region where Prologis is active.

“But actually, on a relative basis, it should be good for our business because it will mean that inventory becomes really important,” he said. “And it means that it’s yet one more uncertainty like the pandemic, earthquake, and all other disruptions we’ve seen that will push the general posture of companies from just in time to just in case…

“I hate to say it would be good because it’s an awful situation that’s going [on] there. And before this is all over, a lot of innocent people are going to get killed, and I don’t want to see this happen. But I don’t think its impact on the business on a relative basis is going to be terrible.”