Will Prologis (PLD) Continue Its Winning Streak in 2024?
Shares of Prologis PLD have surged 18.2% in 2023, outperforming the industry’s growth of 6.7%. This behemoth in the industrial real estate investment trust (REIT) space is experiencing solid demand for its portfolio of strategically located industrial facilities in some of the world’s busiest distribution markets.
The expansion of the e-commerce market has been a key demand driver for Prologis’ modern facilities in recent years. Services such as same-day delivery are gaining traction and last-mile assets in high-income urban areas are witnessing solid pricing, occupancy and rental growth.
In addition, companies are making concerted efforts to improve supply-chain efficiencies, propelling the demand for logistics infrastructure and efficient distribution networks.
To find out whether Prologis, which currently carries a Zacks Rank #3 (Hold), will continue with its rally this year, let’s delve deeper into the fundamentals of the underlying asset category. We’ll also analyze the outlook of this asset category in the context of the macroeconomic factors that are likely to shape the industrial real estate market this year.
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Will PLD’s Rally Continue This Year?
As we step into 2024, the Federal Reserve’s decision to keep the benchmark interest rate steady and the forecast of three rate cuts this year has cheered REIT investors. Given such favorable conditions, it is likely that commercial real estate investment activity will pick up pace this year.
As for the industrial real estate asset category, demand is expected to remain buoyant as growth in industries and expansion of the e-commerce market continue. Companies’ efforts to improve supply-chain efficiencies will drive logistics infrastructure demand in the upcoming period. This bodes well for industrial real estate landlords like Prologis, Rexford Industrial Realty REXR and Stag Industrial STAG.
Per a CBRE Group, Inc. CBRE report, occupiers are focused on strengthening their supply chains by adding more import locations, onshoring or nearshoring more manufacturing operations and adequately staffing their distribution centers. E-commerce will continue to portray steady growth over the next decade, leading retailers and their suppliers to add more warehouse and distribution space.
Despite these promising signs, the asset category will likely face a few near-term headwinds. An expected stabilization of the U.S. industrial market in 2024 will lead to rent growth moderation. Per the CBRE report, rent growth is expected to moderate to 8%. Also, new deliveries in the early part of the year will cause the overall vacancy rate to rise and weaken pricing power.
Nonetheless, given Prologis’ portfolio of strategically located industrial facilities in some of the busiest distribution markets globally, it is well-poised to benefit from the favorable industrial real estate fundamentals. The company's properties are primarily located in large, supply-constrained infill markets in close proximity to airports, seaports and ground transportation facilities, enabling quick product delivery to clients. Given occupiers’ efforts to expand in such locations, PLD, a prominent player in this space, is likely to continue experiencing robust demand for its properties.
The company is actively banking on its 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. Such expansion moves have added greater scale to Prologis’ portfolio over the years and increased its capabilities.
In the past two years, Prologis closed two major acquisitions. In June 2023, it acquired 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 its presence in the key U.S. markets. In 2022, PLD closed the acquisition of Duke Realty in an all-stock transaction valued at $23 billion.
Prologis also has a high number of build-to-suit development projects, highlighting the advantageous location of its land bank, as well as the demand from its multi-site customers, many of whom are focused on e-commerce. The sites are positioned near large population centers suited for serving as the last mile warehouse before goods are delivered to consumers. For 2023, it is expected to carry out development starts ranging from $3 billion to $3.5 billion.
On the balance sheet front, this industrial REIT maintains a healthy balance sheet position, with no significant debt maturities until 2026. As of Sep 30, 2023, its liquidity amounted to $6.9 billion. It also enjoyed credit ratings of A3 (Outlook Stable) from Moody’s and A (Outlook Stable) from Standard & Poor’s, as of the same date, enabling it access to the debt market at favorable rates. Given its balance sheet strength, the company seems well-positioned to carry on with its growth endeavors.
Further, REITs are widely known for their regular dividend payouts as this offers stable income with a good inflation upside shield. With rate cuts expected on the line this year, dividend yields for REITs are likely to be attractive compared with the yields on fixed-income and money-market accounts, making them a desirable investment choice.
Encouragingly, in the last five years, Prologis has increased its dividend five times, and its five-year annualized dividend growth rate is 13.58%. Given the company’s solid operating platform, opportunities for growth, a decent financial position compared with the industry and our year-over-year growth projection of 27.2% for 2023 core FFO, this dividend rate is expected to be sustainable over the long run. Check Prologis’ dividend history here.
Therefore, despite the elevated supply in this space gaining attention, this industrial real estate behemoth has the capability to tide over the near-term industry challenges with its solid portfolio, accretive buyouts and healthy financial position, placing it well for a promising performance this year.
Stocks to Consider
Rexford Industrial Realty currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for REXR’s 2023 FFO per share is pegged at $2.18, indicating a year-over-year increase of 11.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stag Industrial presently carries a Zacks Rank #2. The Zacks Consensus Estimate for STAG’s 2023 FFO per share stands at $2.28, suggesting year-over-year growth of 3.2%.
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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