Will Prologis Be Able to Turn Macro Issues to Its Advantage?

Prologis (PLD) is expected to report higher year-over-year top-line and bottom-line results in 2Q17. The company is scheduled to release its second quarter 2017 results on July 18, 2017.

AFFO (adjusted funds from operations) is expected to be $0.76, a 27.3% rise year-over-year, and revenue is expected to rise almost 7.0% year-over-year to $583.5 million.

In addition to Prologis’s strategic initiatives such as acquisitions, dispositions, and project development activities, several macroeconomic factors also impact the company’s performance.

The Fed has hiked interest rates three times in the last seven months. Speculators expect another rate hike this year. The Fed is expected to reach its target interest rate of 2.0% by phased increases.

The higher interest rate has a significant impact on REITs such as Prologis (PLD) and its peers Duke Realty (DRE), Kilroy Realty (KRC), and Boston Properties (BXP). Prologis and these peers together constitute 14.1% of the iShares Cohen & Steers REIT (ICF). ICF’s wide product diversity gives investors a cushion against macro headwinds.

Prologis may face a higher cost of debt in 2Q17 since higher interest rates raise its cost of capital. That’s particularly true because Prologis and other REITs fund their working capital through debt funds. The sources of funds may become tighter as lenders face higher bank loans and mortgages.

The company’s margins are also expected to remain under pressure since there will be a lower gap between the company interest income and operating cost. That’s mainly due to the higher cost of debt that Prologis is expected to face due to higher interest rates.

However, the negative impact is expected to be offset by the strategic top-line initiatives taken by Prologis. The advantageous locations of its warehouses and distribution facilities, coupled with the company’s expansion initiatives, Internet retailing, rationalization of its portfolio, and supply chain consolidations, are expected to help it combat macroeconomic headwinds.

Wall Street expects Prologis to report a gross margin of 74.7%, which would be flat year-over-year. The company is also expected to report EBITDA (earnings before interest, tax, depreciation, and amortization) of $516.7 billion, which is 88.6% higher than 2Q16. Although interest expense is expected to be higher sequentially, Wall Street expects the company to witness a 3.7% lower interest rate from the previous year’s level.

The growing economy is also expected to boost the company’s results in the second quarter.