2023-03-24 09:53:16 ET
Summary
- PLD is a leading global logistics REIT, providing high-quality industrial properties across 19 countries, catering to diverse tenants such as Amazon, UPS, DHL, and XPO Logistics.
- PLD boasts a strong financial performance, benefiting from the logistics and e-commerce sectors, with a 98% occupancy rate and a healthy same-store cash NOI growth of 9.1% in Q4 2022.
- PLD has a sizable and geographically diverse portfolio of high-quality logistics and distribution facilities, allowing it to capitalize on growth opportunities and maintain a dominant market position.
- PLD skillfully utilizes strategic capital investments to generate sustainable, long-term cash flows, alongside a strong development pipeline backed by a strategically located land bank.
- Considering the potential impact of rising interest rates, PLD's shares may revert to historical market multiples; I advise waiting for more attractive entry points.
Prologis, Inc. ( PLD ) is a leading global logistics REIT focused on providing high-quality industrial properties to customers in key metropolitan distribution hubs.
Company presentation
PLD's expansive portfolio, spanning 19 countries, offers an impressive selection of logistics and distribution facilities that cater to a diverse set of tenants, including notable e-commerce giants such as Amazon ( AMZN ) and logistics providers such as UPS ( UPS ), DHL and XPO Logistics ( XPO ). The top customer is Amazon.
Company Fact Sheet
This article will delve into PLD' financial performance, evaluate PLD's strengths and weaknesses, identify potential opportunities and threats, and provide an analysis of its valuation.
Financial performance
PLD has exhibited robust financial performance, benefiting from the strong tailwinds in the logistics and e-commerce sectors. In the fourth quarter of 2022, PLD reported an impressive 98% occupancy rate, with its same-store cash NOI growing at a healthy 9.1%. Furthermore, PLD's free cash flow per share has demonstrated a steady upward trajectory, driven by its portfolio's high-quality assets and strategic capital investments.
Ycharts
Strengths: Clients, strategic capital, and development pipeline
PLD stands out as a leader in the industrial real estate market, with a sizable and geographically diverse portfolio of high-quality logistics and distribution facilities.
PLD has a rich history of investing in warehouses and is a key player in the industrial real estate sector. With a vast global footprint that spans 19 countries, PLD holds a dominant position in the market. In the US alone, it manages an impressive 570 million square feet of warehouse space, and globally, it manages over 1 billion square feet. As one of the top landlords in this highly sought-after real estate segment, PLD enjoys a leadership status that gives it a significant competitive advantage and allows it to capitalize on growth opportunities.
PLD has a diverse tenant base, which includes both e-commerce giants like Amazon ( AMZN ) and brick-and-mortar retailers like The Home Depot ( HD ), as well as third-party logistics providers such as UPS ( UPS ). Although third-party logistics is the top revenue-generating segment for PLD, it only contributes to 28% of its total revenues. Conversely, the transportation segment, which represents the smallest segment, contributes 12% of the total revenues. PLD's diversified tenant base helps to reduce risks associated with tenant concentration, thus ensuring a more stable and secure business environment.
Company presentation
PLD has skillfully utilized its strategic capital investments to boost its scale and generate sustainable, long-term cash flows. PLD's strategic capital business segment, which is mostly composed of perpetual long-term ventures, offers additional revenue streams through asset management fees, incentive fees, and property management-related fees. Over the past decade, PLD has consistently expanded its AUM, which currently stands at 196 billion, generating 844 million in FFO, with 47% of the revenue coming from recurring fees.
Company presentation
PLD has a strong development pipeline, with projects expected to yield around 5% which is backed by its strategically located land bank.
Company presentation
Weaknesses: Limited pricing power
A weakness not specific to PLD, but rather the industry, is the fragmented and commoditized nature of the sector with low barriers to entry and short lease durations. This limits PLD's pricing power as industrial facilities are often considered commodities with numerous substitutes available in key distribution hubs.
Opportunities: E-commerce
The steady growth of e-commerce is fueling the need for warehouse and distribution space. To put this into perspective, every $1 billion increase in e-commerce sales requires an additional 1.25 million square feet of distribution space to sustain this growth.
Company presentation
Threats: Inflation, interest rates, vertical integration, and international political tensions
The possibility of increasing interest rates and inflationary pressures presents a potential risk to consumer spending, which could ultimately reduce demand for industrial space. In fact, the Federal Reserve raised interest rates by a quarter point today, as part of its efforts to combat high inflation while also addressing financial stability risks. Markets are anticipating an increase in both inflation and interest rates due to rising commodity prices and growing concerns of economic overheating.
Ycharts
Moreover, some of PLD's major clients, such as Amazon and FedEx ( FDX ), have made significant investments in their own distribution and logistics, which could potentially decrease their reliance on third-party logistics providers like PLD.
Additionally, PLD's expansive global presence makes it more vulnerable to international political and trade tensions than some of its domestic competitors.
Valuation
Since 2013, PLD has demonstrated an impressive 19.5% CAGR in AFFO, rising from 820 million to 4.1 billion in 2022.
Author estimates & company filings
While I anticipate medium-term AFFO growth of 5% to 6% driven by PLD's development pipeline, I believe the market is currently pricing in slightly higher growth expectations. Based on my projections, I anticipate AFFO to increase by 6% to 4.3 billion in 2023, resulting in the market valuing PLD's shares at 31.3x 2023's AFFO.
Author estimates, Seeking Alpha & company filings
However, in an environment of rising interest rates, it is more likely that the market multiple will revert to the historical average of 28.6x rather than expand any further. Therefore, I would recommend holding off on purchasing PLD' shares until more attractive entry points become available.
Author estimates, Seeking Alpha & company filings
Conclusion
PLD is a leading player in the industrial real estate market, boasting a vast and diversified portfolio of top-tier logistics and distribution facilities across different locations. PLD's strong financial performance, strategic capital investments, and promising development pipeline make it well-positioned for future growth. However, the nature of the industrial real estate market limits pricing power due to its fragmented and commoditized structure. Additionally, potential risks, such as inflation, interest rates, vertical integration, and international political tensions, could impact PLD's future performance.
Given the possibility of interest rates rising, it is more likely that the market multiples for PLD will return closer to historical averages instead of expanding further. Therefore, I recommend waiting for better entry points.
For further details see:
Prologis' Shares To Face Pressure In A Rising Interest Rate Environment