Addition of this Industrial Real Estate Investment Trust (“REIT”), Prologis, Inc. (PLD – Free Report), for your portfolio seems like a wise idea, given its strong fundamentals and strong outlook.
The industrial real estate market is still running at full speed with strong growth in demand, rents and occupancy. The demand for efficient logistics infrastructure and distribution networks has exploded amid rising e-commerce, growing industries and companies striving to improve supply chain efficiency. In addition to the rapid adoption of e-commerce, an increase in business inventory levels as a precautionary measure for any supply chain disruptions should lead to long-term growth momentum for this sector, providing opportunities for industrial donors.
Moreover, the recent trend of estimate revisions indicates that analysts are bullish on this stock. Over the past month, Zacks consensus estimate for 2022 funds from operations (FFO) per share has risen slightly to $5.15. Prologis currently carries a Zacks rank #2 (buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Although shares of PLD have risen 4.9% over the past year against the industry’s decline of 5.8%, there is still room for further appreciation.
Image source: Zacks Investment Research
Factors that make Prologis a solid choice
Acquisition & Development: The strong demand for industrial real estate has led the company to make efforts to enrich its portfolio. Since the Prologis-AMB merger in 2011 through the end of 2020, this industrial REIT has completed investment transactions totaling more than $131.4 billion across 30 global markets. These investments include a wide range, including the largest M&A deals in the real estate industry and individual off-market deals under $5 million. In 2021, the company’s share of property acquisitions was $901 million, with a weighted average stabilized capitalization rate of 4.6%.
In the first quarter of 2022, Prologis’ share of property acquisitions amounted to $98 million, with a weighted average stabilized capitalization rate of 3.7%. Development stabilization totaled $212 million, while housing starts totaled $1.02 billion, of which 36.6% was custom built. For 2022, the company expects building acquisitions from Prologis between $700 million and $1.2 billion, while development start-ups are expected between $4.5 and $5.0 billion.
In May, Prologis offered to acquire Duke Realty Corp. (DRE – Free Report) in an all-stock deal valued at $61.68 per share. However, Duke Realty called the offer “insufficient” but remained open to exploring opportunities to maximize shareholder value.
Sound operational performance: PLD is experiencing decent operational performance. The average occupancy rate of the portfolio held and managed by Prologis was 97.4% in the first quarter. In addition, the company’s owned and managed portfolio was 98.1% leased as of March 31, 2022. During the quarter under review, 52.2 million square feet of leases were initiated in the owned and managed portfolio of the company. company, with 49.0 million square feet in the operating portfolio. and 3.2 million square feet in the development portfolio. The retention level was 75.4% during the quarter.
Prologis’ share of the net change in effective rents was 37.0% in the January-March quarter, dominated by the United States at 41.5%. The change in cash rent was 19.2%. Same-store net cash operating income increased by 8.7%, led by the United States at 9.7%. Given the good demand for industrial real estate and the good location of Prologis’ portfolio, the favorable trend in its operating performance should continue.
FFO Growth: Over the past three to five years, Prologis has recorded FFO growth per share of 10.07% against an industry average of 0.84%. Also, FFO per share is expected to be up 24.12% in 2022 against an industry average of 9.96%.
Balance sheet and cash flow strength: Prologis benefits from a solid balance sheet, abundant liquidity and easy access to capital. This industrial REIT ended the first quarter of 2022 with cash and cash equivalents of $1.9 billion, compared to $556.1 million at the end of the previous year. Its liquidity was $6.8 billion in cash and availability on its credit facilities. PLD’s weighted average interest rate on its share of total debt was 1.7%, with a weighted average term of 10.0 years. The combined investment capacity of Prologis and its variable capital enterprises, according to their current ratings, is approximately $18 billion.
Current cash flow growth for Prologis is projected at 49.66% compared to industry forecast growth of 9.58%. Additionally, this REIT’s 12-month return on equity (“ROE”) highlights its growth potential. The company’s ROE of 9.98% compares favorably to the industry’s 4.00%, showing that PLD is more efficient in using shareholder funds than its peers.
Dividend: Strong dividend payouts are arguably the biggest draws for REIT shareholders and Prologis remains committed to this. In the first quarter of 2022, the company’s board of directors increased its quarterly dividend by 25.4% to 79 cents per share, up from 63 cents previously paid. Given the company’s strong operating platform, growth opportunities and decent financial position relative to the industry, this dividend rate should be sustainable.
Other actions to consider
Some other key REIT industry picks include Rexford Industrial Realty, Inc. (REXR – free report) and Terreno Real Estate Company (TRNO – free report).
Rexford Industrial Realty currently holds a Zacks Rank of 2. Rexford Industrial Realty revenue in 2022 is expected to grow 34% year-over-year. The Zacks consensus estimate for REXR’s 2022 FFO per share has been revised up 1.6% over the past two months.
The Zacks Consensus Estimate for 2022 FFO per Terreno Realty share has moved slightly north to $1.96 over the past two months. Terreno Realty revenue in 2022 is expected to grow 17.5% year over year. Currently, TRNO carries a Zacks rank of 2.
To note: Everything related to earnings presented in this article represents funds from operations (FFO) – a metric widely used to assess the performance of REITs.