2023-03-24 10:26:43 ET
Summary
- Prologis is a REIT specializing in logistics real estate with $196 billion in assets under management. It is an international company with about 6,600 clients in 19 countries.
- Its top ten customers are well-known quality companies such as Amazon, FedEx, DHL, UPS, etc.
- The recent price correction gives us a chance to buy shares cheaply. In my article, I give 3 reasons why Prologis is buy-worthy.
Introduction
Prologis (PLD) is a REIT specializing in logistics real estate with $196 billion in assets under management. It is an international company with about 6,600 clients in 19 countries. Most NOI comes from the United States (96% of NOI), followed by Europe (8% of NOI). Its top ten customers are well-known quality companies such as Amazon (AMZN), FedEx (FDX), DHL, UPS (UPS), etc.
Prologis' Overview (Investor Presentation)
Prologis is loved by both income and growth investors because this REIT pays a good dividend and has been raising its dividend for many years.
With an average annual return of 14.7%, its 10-year total return exceeds that of the S&P500. The company is doing well, but its institutional ownership is about 95%, which makes it more vulnerable to price fluctuations because they buy and sell a large amount of shares. With interest rates rising, the stock price has corrected, providing a good buying opportunity. In my article, I give 3 reasons why Prologis is buy-worthy.
#1 Growing Earnings, Strong Balance Sheet
Prologis recently reported on its investor relations website its results for the fourth quarter and full year 2022. The company posted strong rental and strategic revenue growth of 25.5% for the year and adjusted FFO growth of 21.7%. Rent growth was nearly 5% for the quarter, bringing full-year rental growth to 28%. And its occupancy is favorable at 98.2% and customer retention is 82.4%.
While interest rates are rising in the United States and Europe, Prologis managed to raise more than $1.1 billion at less than 3% interest, including $700 million in new unsecured loans from Japan and Canada.
For 2023, Prologis expects 10% rental growth in the United States and 9% growth globally, and with net effective same-store growth of about 8% to 9%. Occupancy will be between 96.5% and 97.5%. Core FFO is expected to be between $5 and $5.1 per share, representing about 9.5% growth from 2022.
Highlights - company performance (Prologis' 4Q22 Investor Presentation)
The client base is well diversified with Amazon at the top, accounting for 5.3% net effective rent. The finances of the portfolio companies are excellent, which also gives Prologis assurance of a successful future. The weighted average term of the remaining leases is 4.2 years. And looking at its debt, the debt/adjusted EBITDA increased slightly to 4x times. The weighted average interest rate also increased slightly from last quarter to 2.5%, with only 13.3% variable interest. The average maturity of debt is favorable at 9.1 years. When its debt matures, the company has to refinance its debt at higher rates, which affects its profitability. The average maturity of the debt is far into the future, so investors do not have to worry about rising interest rates, which are currently much higher than in previous years.
Prologis' Top Customers (2Q22 Investor Presentation)
#2 Growing Dividends And No Share Dilution
REITs distribute 90% of their taxable income to shareholders in the form of dividends. For Prologis, this currently equates to a dividend of $3.48, representing a dividend yield of 3.1%. The dividend has increased at an average annual rate of 10.9%, with strong growth in 2022 (+25.4%). The average annual growth rate is in line with FFO's core growth rate of 11% over the past 5 years. Analysts expect the dividend to rise 5.9% next year.
Dividend Growth History (Seeking Alpha PLD ticker page)
Most REITs issue equity as a way to increase their cash balance to acquire and lease real estate, as an alternative to issuing bonds or other forms of debt. They issue shares only when they believe their stock price is overvalued relative to the general market. In addition to dilution, issuing shares can be beneficial to shareholders because the cash flow from leasing additional properties increases profits - and thus shareholders' dividends. Prologis does not issue shares, so its stock is not diluted, but its earnings and dividends are still growing strongly. It is purely a management decision whether or not to issue shares, and I think Prologis' management is making a good decision because the company is still growing strongly.
Prologis' Cash Flow Highlights (SEC and author's own calculations)
#3 Its Stock Valuation Is In Favorable Territory
A REIT is traditionally valued based on the price to FFO ratio. However, YCharts does not give us this ratio in their charts, so I created my own table.
We see in the table below that the valuation has increased significantly over the past 4 years to 2021. In 2021, Prologis was trading at a price on FFO of 44, indicating that the company was then overvalued. The share price peaked that year and is currently in a downward trend, with the current price 33% below the peak. The price to FFO ratio is now valued favorably with a ratio of 20.7. Prologis is still performing strongly, but increased interest rates have corrected asset prices to normal levels. The recent price correction provides an opportunity to buy shares cheaply.
Prologis' Historical Price to Funds From Operations (Author's own calculations)
Interest rates are expected to increase to 5.5% by the end of this year. Therefore, the yield on 10 year treasuries could increase further which affect asset prices. Investors in REITs could opt for safer alternatives such as government bonds. But I don't think this will happen to Prologis as the company is also a safe play considering its strong customer base.
Conclusion
Prologis is a fast-growing REIT with more than $196 billion in assets under management. Its customers are of high quality such as Amazon, FedEx, DHL, UPS, etc. The core FFO has grown strongly with a CAGR of 11% over the past 5 years without issuing (and diluting) shares.
Fourth quarter results were impressive. Positives to note include $1.1 billion in borrowings at less than 3% interest, strong revenue growth of 25.5% and adjusted FFO growth of 21.7% for the year 2022, a strong balance sheet with an average debt maturity of 9.1 years, and a strong outlook for 2023.
Dividends have risen sharply, averaging 10.9% a year, thanks to strong growth in 2022. The dividend yield is currently 3.1% and analysts expect it to rise 5.9% next year.
The recent price correction gives us a chance to buy shares cheaply. The price to AFFO is just 20.7, which compares favorably with the historical average of 30.2. With strong earnings growth and a healthy balance sheet, growing dividends without dilution and a favorable stock valuation, Prologis is worth buying.
For further details see:
3 Reasons Why Prologis Is Worth Buying