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Analyst Blog

On Jun 27, 2013, we reiterated our long-term recommendation on Prologis Inc. (PLD - Analyst Report), a San Francisco-based industrial real estate investment trust (REIT), at Neutral. The move reflects the company’s solid operating platform, recent deals and concerted efforts to capitalize on promising opportunities across the globe. Yet, with sluggish economic growth, we are not overtly optimistic on the stock and believe that the risk/reward profile is currently balanced. 

Why Neutral?

Prologis’ first-quarter 2013 core FFO (funds from operations) per share of 40 cents was in line with the Zacks Consensus Estimate and the prior-year quarter figure. Results reflected decent revenues in the reported quarter, and completion of the Japan-REIT IPO as well as the European joint venture. Moreover, its strategic measures have helped it lower its overall debt level.

With growth in e-Commerce, there is an increasing demand for Class-A facilities and Prologis stands to benefit as it has the capacity to offer modern distribution facilities in strategic infill locations.

Also, the recent build-to-suit deal in Poland is a strategic fit as it will enable the company to substantially penetrate the industrial real estate market of Europe. Moreover, its build-to-suit deal in the first quarter with end-to-end e-Commerce service provider - SpeedFC, a subsidiary of Navarre Corp. and the transaction with Chinese logistics provider, Deppon are expected to contribute meaningfully to the company’s top line.

Yet, its increasing international presence might negatively impact Prologis amid economic fluctuations and impair its top-line growth. In addition, market vacancy increases will mitigate Prologis’ ability to push through rental-rate increases. Also, rising interest rates would increase its cost of financing.

For Prologis, the Zacks Consensus Estimates for 2013 and 2014 FFO per share remained stable at $1.62 and $1.80 per share, respectively, over the last 30 days. Hence, the stock carries a Zacks Rank #3 (Hold).

Other REITs to Consider

Two other REITs that are worth considering include Extra Space Storage Inc. (EXR - Snapshot Report), which has a Zacks Rank # 1(Strong Buy), and CubeSmart (CUBE - Snapshot Report) that has a Zacks Rank # 2 (Buy).

Note: Funds from operations, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

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