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Analyst Blog

On Apr 4, 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 strategic initiatives toward global expansion. Yet, in the presence of an uncertain economic environment we are not overtly optimistic on the stock and believe that the risk/reward profile is currently balanced.  

Why Neutral?

Prologis provides industrial distribution warehouse space in some of the busiest distribution markets across the globe. 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.

Its properties are typically located in large, supply-constrained infill markets at close proximity to airports, seaports, and ground transportation facilities, which enable rapid distribution of customers’ products. This has enabled the company to gain a significant pricing advantage over its competitors. Moreover, leasing decisions that were earlier postponed due to volatility in the markets are gradually coming off the shelf.

Curently, Prologis is significantly capitalizing on promising opportunities across the globe. Its recent build-to-suit deal with end-to-end e-Commerce service provider - SpeedFC, a subsidiary of Navarre Corp. and with Chinese logistics provider, Deppon are expected to contribute meaningfully to the company’s top line. Also, the joint venture with Norges Bank Investment Management is a strategic fit as it will enable the company to substantially penetrate the industrial real estate market of Europe.

Yet, given its international presence, Prologis often faces unfavorable foreign currency movements and other economic fluctuations that impair its top-line growth. Moreover, the continued troubles in the residential sector are weighing on commercial property operations. In addition, market vacancy increases will offset Prologis’ ability to push through rental rate increases. This has significantly affected the long-term growth of the company.

Prologis’ core FFO (funds from operations) per share of 42 cents in the fourth quarter of 2012 was in line with the Zacks Consensus Estimate. Total revenue during the reported quarter was $517.6 million, up 13.3% from the prior-year period and well ahead of the Zacks Consensus Estimate of $476 million.

Over the last 7 days, the Zacks Consensus Estimate for full-year 2013 remained unchanged at $1.67 per share while the Zacks Consensus Estimate for full-year 2014 stood at $1.79 per share. In addition, Prologis has now delivered positive earnings surprises in 2 out of past 4 quarters with an average beat of 2.36%. Hence, Prologis now has a Zacks Rank #3 (Hold).

Other Stocks to Consider

REITs that are currently performing well include Federal Realty Investment Trust (FRT - Analyst Report) and Cousins Properties Incorporated (CUZ - Analyst Report), both carrying a Zacks Rank #2 (Buy).
 
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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