Shares of Prologis PLD have risen 11.4% in the quarter-to-date period, outperforming the industry’s growth of 5.5%.
In July, this behemoth of the industrial real estate investment trust (“REIT”) category reported second-quarter 2022 core funds from operations (FFO) per share of $1.11, up 10% from the year-ago quarter.
Rental revenues of $1.09 billion were up from the prior-year quarter’s $1.01 billion. Results reflected an improvement in average occupancy and rent growth.
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Let us look at the factors behind this surge in the stock price.
The industrial real estate market 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 precautionary measure for any supply-chain disruption is expected to lead to long-term growth momentum for this sector, offering scope to industrial landlords. Given Prologis’ solid capacity to offer modern logistics facilities, the company is well-poised to bank on this trend.
PLD is witnessing a decent operating performance. The average occupancy level in Prologis’ owned and managed portfolio was 97.6% in the second quarter. In the quarter under review, 51.3 million square feet of leases commenced in the company’s owned and managed portfolio, with 43.6 million square feet in the operating portfolio and 7.7 million square feet in the development portfolio. The retention level was 78.6% in the quarter.
Prologis’ 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%. The cash rent change was 27.5%. For 2022, management increased its overall market rent growth forecast to 23% on a global basis and 25% in the United States due to low vacancy and healthy demand prevailing in the market.
Cash same-store net operating income grew 8.2% in the second quarter, which was led by the United States at 9.0%. Given the healthy demand for industrial properties and Prologis’ well-located portfolio, the favorable trend in its operating performance is likely to continue and boost investors’ optimism about the stock.
The solid demand for industrial real estate resulted in the company making efforts to enhance its portfolio. For 2022, the company anticipates building acquisitions at Prologis share between $1.2 billion and $1.7 billion, while development starts are expected in the range of $4.5-$5.0 billion.
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 is expected to be complete in the fourth quarter of 2022.
Prologis also raised its 2022 core FFO per share guidance to the range of $5.14-$5.18 from the $5.10-$5.16 band guided earlier, indicating a 0.6% increase at the midpoint. The company expects average occupancy in the band of 97.25-97.75%, up 38 basis points at the midpoint. Cash same-store NOI (Prologis share) is projected in the band of 8.25-8.75% compared with the 7.25-8.00% band guided earlier.
Prologis enjoys a strong balance sheet and ample liquidity and has easy access to capital. Its 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 at 49.66% compared with the 9.7% growth projected for the industry.
Moreover, this REIT’s trailing 12-month return on equity (“ROE”) highlights its growth potential. 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. Given its balance sheet strength and prudent financial management, the company is well-poised to capitalize on growth opportunities.
Analysts seem bullish on this Zacks Rank #3 (Hold) stock. The estimate revision trend in the past month for the third-quarter 2022 FFO per share indicates a favorable outlook for the company as it has increased marginally in the past month to $1.76. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, the rising supply in several markets is likely to intensify competition and curb pricing power. The stabilization of e-commerce sales growth and more modest demand remain concerns for rent increases.
Stocks to Consider
Some key picks from the REIT sector include Public Storage PSA and Host Hotels & Resorts HST.
Public Storage carries a Zacks Rank of 2 (Buy) at present. Public Storage’s long-term growth rate is projected at 7%. The Zacks Consensus Estimate for PSA’s 2022 FFO per share has been revised marginally upward in the past month.
The Zacks Consensus Estimate for Host Hotels & Resorts’ 2022 FFO per share has moved nearly 3.6% upward in the past month to $1.73. HST presently carries a Zacks Rank of 2.
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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