Prologis, Inc. is a US$53b large-cap, real estate investment trust (REIT) based in San Francisco, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of PLD is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I'll take you through some of the things I look at when assessing PLD.
Funds from Operations (FFO) is a higher quality measure of PLD's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For PLD, its FFO of US$1.8b makes up 77% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether PLD has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take PLD to pay off its debt using its income from its main business activities, and gives us an insight into PLD’s ability to service its borrowings. With a ratio of 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take PLD 6.15 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times PLD’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 7.87x, it’s safe to say PLD is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at PLD's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. PLD's price-to-FFO is 29.41x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Prologis can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for PLD:
- Future Outlook: What are well-informed industry analysts predicting for PLD’s future growth? Take a look at our free research report of analyst consensus for PLD’s outlook.
- Valuation: What is PLD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PLD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.