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The industrial asset category has been displaying resilience amid the coronavirus pandemic with low vacancy rates, high asking rents and robust rent collections. There has been a notable increase in e-commerce’s share of total retail sales, spurring demand for warehouse and distribution spaces. Also, apart from the fast adoption of e-commerce, the industrial real estate space is anticipated to benefit over the long run from a likely increase in inventory levels by companies as a precaution for any supply-chain disruptions.
This, in turn, will likely keep supporting industrial landlords like Prologis, Inc. PLD, Duke Realty Corp. DRE, Industrial Logistics Properties Trust ILPT and Terreno Realty Corporation TRNO, among others, to enjoy a favorable market environment.
Particularly, Prologis is well positioned to capitalize on the favorable environment backed by its solid operating platform and robust scale. The company, which has emerged as a market leader in this asset category, is witnessing solid demand for its industrial real estates, as reflected by the leasing, rent and occupancy levels of the properties.
At the end of third-quarter 2020, occupancy level in the company’s owned-and-managed portfolio was 95.6%. During the recently-reported quarter, 48.8 million square feet of leases commenced in the company’s owned-and-managed portfolio, with 41.7 million square feet being in the operating portfolio and 7.1 million square feet in the development portfolio. Prologis’ share of net effective rent change was 25.9% during this period, aided by the United States at 30.7%. Cash rent change was 11.7%.
Prologis is also banking on growth opportunities through acquisitions and developments. This February, the company accomplished the $13-billion acquisition of Liberty Property Trust. In addition, during the July-September quarter, Prologis’ share of building acquisitions amounted to $195 million, with a weighted average stabilized cap rate of 4.3%. Development stabilization aggregated $554 million, while development starts totaled $392 million, with 87.5% being build-to-suit. Moreover, its high number of build-to-suit development projects highlights the advantageous location of the company’s land bank.
Further, Prologis is focused on bolstering its liquidity and is well poised to leverage on growth opportunities. The company ended the third quarter with $5.17 billion in liquidity. Its credit ratings at Sep 30, 2020, were A3 from Moody’s and A- from Standard & Poor’s, both with stable outlook, allowing the company to borrow at an advantageous rate. Furthermore, management noted that it continues to maintain significant dividend coverage at 1.6 times and expect 2020 free cash flow after dividends of $1.1 billion.
In addition, the trend in estimate revisions of 2020 funds from operations (FFO) per share indicates a favorable outlook for the company. The Zacks Consensus Estimate for 2020 FFO per share has been revised upward 1.1% in a month’s time. Therefore, given the progress on fundamentals and upward estimate revisions, there is decent upside potential to the stock.
However, with the asset category being attractive amid these challenging times, there is a development boom in some markets. This high supply is likely to fuel competition and curb pricing power. Furthermore, recovery in the industrial market has continued for long and market rents are expected to remain nearly flat for the remaining of the year.
Also, industrial real estate fundamentals though seem more resilient than other asset categories, are not immune. There is continued uncertainty across the globe and thus, the pandemic’s adverse impact on the economy might hurt demand for spaces in the near term.
Shares of Prologis have outperformed the industry it belongs to in the past six months. This Zacks Rank #3 (Hold) company’s shares have gained 22%, while the industry has rallied 19% during the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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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Prologis, Inc. (PLD) : Free Stock Analysis Report
Duke Realty Corporation (DRE) : Free Stock Analysis Report
Terreno Realty Corporation (TRNO) : Free Stock Analysis Report
Industrial Logistics Properties Trust (ILPT) : Free Stock Analysis Report
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