2023-08-18 08:20:00 ET
Summary
- Prologis is the largest player in Industrial REITs, with exposure to high barrier-to-entry markets.
- PLD has a strong track record of FFO/share growth and enjoys high occupancy and tenant retention rates.
- The company is poised for continued growth due to increasing demand for industrial real estate and potential acquisitions, as well as its new businesses in solar production and EV charging.
It's no secret that real estate has been pressured over the past 18 months, with interest rates being the boogeyman that keeps coming back to haunt the industry. That's why conservative income investors may want to stick with the strongest players in the space, such as Public Storage (PSA) for self-storage REITs and in the case of industrial REITs, Prologis (PLD), which is the largest player.
I last covered PLD here back in November of 2022, detailing its fundamentals and came to the conclusion that its strong balance sheet, earnings power and undervaluation made it an attractive pick, and the stock has since risen by 4% since then. In this article, I provide recent updates and determine whether if the stock remains a buy, so let's get started.
Why PLD?
Prologis is a leading logistics REIT with focus on high-barrier, high growth markets. At present, it has a presence in 19 countries and properties covering 1.2 billion square feet that serve 6,700 customers. It also has a fairly strong track record of FFO/share growth. As shown below, FFO/share per quarter has more than doubled over the past 10 years, and growth has accelerated since 2021.
PLD also enjoys strong occupancy of 97.5% and tenant retention of 71%. Same store Cash NOI also grew robustly by 10.7% YoY during the second quarter, driven by high lease spreads on new and renewal leases. This was notable in the Phoenix, Northern New Jersey, and Southern California markets, where rents on new and renewal leases grew between 137% and 181%.
This demonstrates accelerating demand for well-located industrial real estate in prime markets, where there is a strong imbalance between supply and demand due to the low availability of undeveloped land. This imbalance is further exacerbated by higher interest rates, which raises the cost of capital for higher leveraged players to create new supply, as reflected by new industrial property construction starts being down by 40% across U.S. markets and 50% in Europe. Plus, the onshoring of manufacturing activities back to home markets may be another growth driver, due to the number of global supply chain disruptions we've seen over the past 2 years in particular.
PLD is forecasting full-year rent growth in the 7% to 9% range in response to global demand driven by the aforementioned reason and secular demand stemming from e-commerce growth. Additional growth may come from external acquisitions, which included 14 million square foot in what management believes to be some of its best U.S. markets, with an estimated 8% unlevered internal rate of return at the property level.
Moreover, PLD has other levers for growth stemming from new businesses such as its Essentials business, with 45 MW of new solar production and storage added just in the first half of the year, bringing the platform total to 450 MW, nearly 50% of the way to the company goal of 1 GW in 2025. Additionally, Prologis's EV business now has 65 charging sites across the U.S. and Europe.
Risks to PLD include higher interest rates, which would raise its cost of debt and while industrial real estate demand has been robust, it remains a cyclical industry that's closely tied to the overall health of the economy. As such, a recession could put a damper on the near-term growth thesis.
Nonetheless, PLD maintains a strong balance sheet with $6.4 billion of liquidity and a low debt to EBITDA ratio of 4.2x. Its near-term funding needs appear to be set, as it was able to raise $7 billion in debt across 4 currencies this year with an attractive interest rate of 4.9% and average term of 8 years.
From a technical standpoint, the market has had plenty of time to digest the potential impact of higher interest rates. As shown below, PLD has found support in the $115 to $120 range since the start of the year.
Analysts are forecasting a resumption to low- to mid-teens annual FFO/share growth starting in 2025 and as shown below, PLD scores an A+ grade for growth, with AFFO growth that sits well above the sector median.
Considering all the above, I continue to view PLD to be attractive at the current price of $120 with a forward P/FFO of 21.5 and a 2.9% dividend yield. The dividend is well covered by a 62% payout ratio and comes with a 12.5% 5-year CAGR and 9 years of consecutive growth.
While Seeking Alpha's Quant rates the stock as a hold , it has more to do with valuation, while score PLD with high arks for growth, profitability, momentum, and analyst revisions. PLD also appears to be attractive compared to peers Rexford Industrial (REXR) and Terreno Realty (TRNO), with an EV/EBITDA of 25 that sits below the 29 of REXR and 31 of TRNO, as shown below.
Investor Takeaway
Prologis offers conservative income investors a strong balance sheet, earnings power and relative undervaluation that make it an attractive pick. With growing demand for industrial real estate from e-commerce growth and the onshoring of manufacturing activities back to home markets, it's poised to continue its strong FFO/share growth trajectory, especially as new supply is constrained. As such, with a near 3% yield and long-term FFO/share growth that could be in low to mid-teens, PLD remains a reliable choice for income and growth.
For further details see:
Prologis: Why The Posterchild Of Industrial REITs Is A Buy