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Here's Why Should Hold Prologis (PLD) Stock in Your Kitty

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Prologis Inc. (PLD - Free Report) is well-positioned to bank on the favorable industrial real estate market environment backed by its solid operating platform and robust scale. The company, which has emerged as a market leader in this asset category, is witnessing solid demand for its industrial real estate as reflected by the leasing, rent and occupancy levels of the properties.

Undoubtedly, with the e-commerce boom, growth in industries and companies making efforts to improve supply-chain efficiencies, demand for logistics infrastructure and efficient distribution networks has risen. This is aiding the industrial real estate market to prosper. Apart from the fast adoption of e-commerce, logistics real estate is anticipated to benefit from an increase in inventory levels post the global health crisis, offering possibilities to industrial landlords, to enjoy a favorable market environment.

Prologis, in particular, has been witnessing decent operating performance amid the pandemic. The average occupancy level in Prologis’ owned and managed portfolio was 96.6% in the third quarter, expanding 60 basis points (bps) from the second quarter of 2021. The company’s owned and managed portfolio was 98.0% leased as of Sep 30, 2021. In the quarter under review, 49.5 million square feet of leases commenced in PLD’s owned and managed portfolio, with 42.1 million square feet in the operating portfolio and 7.4 million square feet in the development portfolio. The retention level was 79.3% in the quarter.

Prologis’ share of net effective rent change was 27.9% in the July-September period. Cash rent change was 12.9%. Cash same-store net operating income grew 6.7%, driven by the U.S. business at 6.9% and the International business at 5.9%.

With healthy operating fundamentals in the industrial real estate markets, Prologis has capitalized on growth opportunities through acquisitions and developments. The company’s share of building acquisitions amounted to $373 million, with a weighted average stabilized cap rate of 5.0% in the reported quarter. Development stabilization aggregated $368 million, while development starts totaled $1,449 million, with 60.3% being build to suit. Its high number of build-to-suit development projects highlight the advantageous location of the company’s land bank.

For 2021, the company anticipates $1.2-$1.4 billion of building acquisitions at Prologis share compared with the $700-$900 million stated earlier. Development starts are expected to be $3.5-$3.8 billion compared with the $3.05-$3.35 billion mentioned earlier.

Prologis is focused on bolstering its liquidity. The industrial REIT exited the third quarter of 2021 with cash and cash equivalents of $585.1 million. Its liquidity amounted to $5.5 billion in cash and availability on its credit facilities. Debt, as a percentage of total market capitalization, was 16.7%. The company's weighted average interest rate on its share of total debt was 1.8%, with a weighted average term of 10.4 years. The combined investment capacity of Prologis and its open-ended ventures, in line with their current ratings, is roughly $15 billion. Given its balance-sheet strength and prudent financial management, the company is well poised to capitalize on growth opportunities.

Shares of PLD have outperformed the industry it belongs to in the past three months. This Zacks Rank #3 (Hold) company’s shares have gained 12.1% compared with the industry’s increase of 1.6% during the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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With the asset category being attractive in these challenging times, there is a development boom in several markets. This high supply is likely to fuel competition and curb pricing power. New supply is likely to put pressure on the vacancy level, which is likely to increase to some extent in the upcoming quarters.

Recovery in the industrial market has continued for long. The growth of e-commerce sales is likely to stabilize to some extent in the upcoming quarters. Therefore, any robust performance is unlikely in the near term. With comparatively more modest demand, coupled with new supply, the pace of overall growth in rent will likely be moderate in the upcoming period.

Key Picks

Some key picks from the REIT sector include Terreno Realty Corporation (TRNO - Free Report) , CubeSmart (CUBE - Free Report) and Rexford Industrial Realty (REXR - Free Report) .

Terreno Realty holds a Zacks Rank of 2 (Buy), at present. Its 2021 FFO per share is expected to increases 19.4% year over year.

The Zacks Consensus Estimate for Terreno Realty’s 2021 FFO per share has been revised marginally upward in a month.

CubeSmart’s Zacks Consensus Estimate for the ongoing-year FFO per share has moved 1% north to $2.05 over the past month.

CubeSmart’s 2021 FFO per share estimate suggests an increase of 19.2% year over year. Currently, CubeSmart carries a Zacks Rank of 2.

Rexford Industrial holds a Zacks Rank of 2, at present. Rexford Industrial's long-term growth rate is projected at 12.9%.

The Zacks Consensus Estimate for REXR’s 2021 FFO per share has been revised 4.5% upward in a month to $1.63.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.