With the capacity to offer modern facilities in key locations, Prologis PLD is well-poised to bank on the favorable trend in the industrial real estate market. This asset category is still firing on all cylinders, with robust demand, rents and occupancy growth.
In addition to the fast adoption of e-commerce, a rise in the inventory levels of companies as a precaution for any supply-chain disruption is expected to lead to long-term growth momentum for this sector, offering scope to industrial landlords, including the behemoth, Prologis.
PLD is witnessing a decent operating performance. The average occupancy level in Prologis’ owned and managed portfolio was 97.6% in the second quarter. The company’s share of the net effective rent change was 45.6% in the April-June quarter, which was led by the United States at 54.0%.
Banking on the solid demand for industrial real estate, the company has been enhancing its portfolio. In June, Prologis announced that it would acquire Duke Realty DRE in an all-stock transaction valued at $26 billion, including the assumption of debt. The transaction with Duke Realty is expected to be complete in the fourth quarter of 2022.
For 2022, the company anticipates building acquisitions at Prologis share between $1.2 billion and $1.7 billion, while development starts are expected to be $4.5-$5.0 billion.
Prologis enjoys a strong balance sheet and ample liquidity. It has easy access to capital. The company’s liquidity amounted to $5.2 billion in cash and availability on its credit facilities at the end of the second quarter. Prologis’ current cash flow growth is projected to be 49.66% compared with 9.7% growth expected for the industry. The company’s ROE of 9.85% compares favorably with the industry’s 3.76%, reflecting that PLD is more efficient in using shareholders’ funds than its peers.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders and Prologis remains committed to the same. PLD has increased its dividend five times in the last five years and the five-year annualized dividend growth rate is 11.29%.
Over the past three months, shares of the company have gained 3%, outperforming the industry’s growth of 2.9%. Also, analysts seem bullish on the Zacks Rank #2 (Buy) stock. The estimate revision trend in the past month for 2022 funds from operations (FFO) per share indicates a favorable outlook for the company, as it has increased marginally in the past two months to $5.17. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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However, with the asset category being attractive in challenging times, there is a development boom in a number of markets. The high supply is likely to fuel competition and curb pricing power. New supply is likely to affect pressure on the vacancy level and rent growth to some extent in the upcoming quarters.
A hike in the interest rate is concerning for Prologis. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. PLD had a substantial debt burden of $18.04 billion as of Jun 30, 2022.
Stocks to Consider
Some other top-ranked stocks from the REIT sector are Extra Space Storage EXR and Host Hotels & Resorts HST.
The Zacks Consensus Estimate for Extra Space Storage’s 2022 FFO per share has moved up 1.6% in the past month to $8.46. EXR’s long-term growth rate is projected at 8.7%. The company presently carries a Zacks Rank of 2.
Host Hotels & Resorts carries a Zacks Rank of 2 at present. The Zacks Consensus Estimate for HST’s 2022 FFO per share has moved up 3.5% in the past month to $1.79.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Host Hotels & Resorts, Inc. (HST) : Free Stock Analysis Report
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