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Neutral Stance on Prologis

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On Sep 24, 2013, we reaffirmed our long-term recommendation on Prologis Inc. (PLD - Free Report) at Neutral. Our decision is based on the company’s decent second-quarter results, strategic measures to improve its core operations and recent efforts to increase its dominance in the industrial real estate market of Europe and Asia. Yet, with the sluggish economic growth, we are not overtly optimistic on the stock and believe that the risk/reward profile is currently balanced.

Why Neutral?

Prologis delivered a positive earnings surprise of about 7.9% for the second quarter of 2013. This industrial real estate investment trust (REIT) reported core FFO (funds from operations) per share of 41 cents, beating the Zacks Consensus Estimate of 38 cents. However, it fell short of the prior-year quarter figure by 2 cents.

Results primarily reflect a decent reduction in expenses, though the benefit was partly offset by a fall in revenues. Yet, the company’s strategic measures and capital market moves have helped enhance flexibility, extend maturities and lower interest expenses.

Going forward, we believe that with a larger customer base, rise in e-Commerce application and supply chain consolidation, there will continue to be 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.

Moreover, of late, the company penned a Build-to-Suit deal with Hi Logistics in UK for facilities spanning over 700,000 square feet. A similar agreement was inked with L'Oreal, the French cosmetics group for a 270,000 square feet space in France. Most recently, the company entered into a Build-to-Suit deal with Brazil - WMB Comercio Eletronico LTDA, a unit of Wal-Mart Stores Inc.’s (WMT - Free Report) global e-commerce organization for a distribution center, which would span 576,000 square foot in Sao Paulo, Brazil.

Yet, the protracted economic growth in most parts of the world makes us skeptical on the stock. Moreover, cut-throat competition and market vacancy increases may reduce its ability to push through rental-rate increases while rising interest rates leads to a rise in cost of financing.

Notably, for full-year 2013, Prologis narrowed its core FFO guidance to $1.63 to $1.67 per share from the prior range of $1.60 to $1.70 per share. Alongside, the company raised its full-year deployment outlook. It increased the range by $1.7 billion to $3.5 billion – $4.1 billion.

Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO per share increased 1.2% to $1.64. However, for 2014 it moved down 1.1% to $1.79 per share. The stock currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better performing REITs that are worth a look include CubeSmart (CUBE - Free Report) and Sovran Self Storage Inc. , both carrying a Zacks Rank #2 (Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

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