Prologis PLD is well-poised to capitalize on favorable conditions in the industrial real estate market due to its strong operational foundation and substantial scale. As a prominent player in this asset class, the company experiences healthy demand for its industrial real estate offerings, as evidenced by the strong performance of leasing and rental rates.
Over the past years, due to the surge in e-commerce, the expansion of various industries and continuous endeavors to enhance supply-chain effectiveness, there has been a notable increase in the need for logistics infrastructure and streamlined distribution networks. This upswing has contributed to the thriving state of the industrial real estate market, which has been proving advantageous for companies like Prologis, STAG Industrial STAG and First Industrial Realty Trust FR.
The future of supply chains hinges on their ability to remain resilient. Consequently, in the long run, apart from the fast adoption of e-commerce, logistics real estate is expected to benefit from an increase in inventory levels. This opens up opportunities for industrial property owners, including Prologis, STAG Industrial and First Industrial Realty, to thrive in a favorable market environment.
In particular, PLD provides industrial distribution warehouse space in some of the busiest distribution markets worldwide. The properties of the company are typically located in large, supply-constrained infill markets in close proximity to airports, seaports and ground transportation facilities, which facilitates the rapid distribution of customers’ products. The solid demand for Prologis’ strategically located facilities has driven healthy operating performance over the past few quarters.
In the third quarter of 2023, 46.4 million square feet (msf) of leases commenced in the company’s owned and managed portfolio, with 42.3 msf in the operating portfolio and 4.1 msf in the development portfolio. The average occupancy level in Prologis’ owned and managed portfolio remained high at 97.1%. For 2023, management expects occupancy in the band of 97.25-97.50%. We estimate occupancy to be 97.3%. Also, our estimate points to a year-over-year increase of 38.7% in rental revenues in the current year.
With healthy operating fundamentals in industrial real estate markets, Prologis has capitalized on growth opportunities through acquisitions and developments. Its investments over the years comprise a wide array, including the largest M&A transactions in the real estate sector and individual off-market deals below $5 million.
In June 2023, it concluded the buyout of nearly 14 million square feet of industrial properties from opportunistic real estate funds affiliated with Blackstone for cash consideration of $3.1 billion. The move significantly enhanced Prologis’ presence in the key U.S. markets, poising it well for long-term growth.
Moreover, the company’s share of building acquisitions amounted to $238 million in the nine months that ended Sep 30, 2023. Development stabilization aggregated $1.92 billion, while development starts totaled $1.35 billion. For 2023, the company anticipates acquisitions at Prologis share between $500 million and $800 million, while development starts are expected in the range of $3-$3.5 billion.
PLD maintains a healthy balance sheet position with ample flexibility. This industrial REIT’s liquidity amounted to $6.9 billion as of Sep 30, 2023. The company's weighted average interest rate on its share of the total debt was 2.9%, with a weighted average term of 9.5 years. It has no significant debt maturities until 2026. Given its balance sheet strength and prudent financial management, the company is well-poised to capitalize on long-term growth opportunities.
Moreover, solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Prologis is committed to that. In the last five years, Prologis has increased its dividend five times, and its five-year annualized dividend growth rate is 13.58%. Check Prologis’ dividend history here.
Analysts seem bullish regarding PLD’s funds from operations (FFO) growth prospects. The Zacks Consensus Estimate for the company's 2023 FFO per share has been revised marginally upward over the past two months to $5.60. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of Prologis have rallied 13.4% over the past month, outperforming the industry’s increase of 11.9%.
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However, with the asset category being attractive even during challenging times, there is a development boom in many markets. This high supply is likely to fuel competition and curb pricing power. New supply is likely to create pressure on vacancy levels and rent growth to some extent in some of the company’s markets in the upcoming quarters.
Moreover, a high interest rate is a concern for Prologis. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. The company’s consolidated debt as of Sep 30, 2023 was $27.6 billion. For 2023, our estimate indicates a significant year-over-year increase in the company’s interest expenses. Further, with high interest rates in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
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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