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5 Reasons to Add Prologis (PLD) Stock to Your Portfolio

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Adding this industrial real estate investment trust (“REIT”), Prologis, Inc. (PLD - Free Report) , to your portfolio seems a wise idea, given the strength of its fundamentals and solid prospects.

The industrial real estate market is still firing on all cylinders with robust demand, rents and occupancy growth. In addition to the fast adoption of e-commerce, a rise in the inventory levels of companies as a precautionary measure for any supply-chain disruption is expected to lead to long-term growth momentum for this sector, offering scope to industrial landlords.

Prologis reported second-quarter 2022 core funds from operations (FFO) per share of $1.11, up 10% from the year-ago quarter. Rental revenues of $1.09 billion were up from the prior-year quarter’s $1.01 billion. Results reflected an improvement in average occupancy and rent growth. Prologis also raised its 2022 core FFO per share guidance to the range of $5.14-$5.18 from the $5.10-$5.16 band guided earlier, indicating a 0.6% increase at the midpoint.

Moreover, the recent estimate revision trend indicates that analysts are bullish on this stock. Over the past month, the Zacks Consensus Estimate for 2022 FFO per share has moved marginally upward to $5.17. Prologis currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While shares of PLD have rallied 11.2% in the past month compared with the industry's increase of 7.6%, there is still room left for further appreciation.

Zacks Investment Research
Image Source: Zacks Investment Research

Factors That Make Prologis a Solid Pick

Acquisitions & Development: The solid demand for industrial real estate resulted in the company making efforts to enhance its portfolio. Since the Prologis–AMB merger in 2011 through year-end 2020, this industrial REIT has accomplished investment transactions aggregating more than $131.4 billion across 30 global markets. These investments comprise a wide array, including the largest M&A transactions in the real estate sector and individual off-market deals less than $5 million. In 2021, the company’s share of building acquisitions amounted to $901 million, with a weighted average stabilized cap rate of 4.6%.

In the second quarter of 2022, Prologis’ share of building acquisitions amounted to $846 million, with a weighted average stabilized cap rate of 3.9%. Development stabilization aggregated $817 million, while development starts totaled $1.67 billion, with 25.6% being build-to-suit. For 2022, the company anticipates building acquisitions at Prologis share between $1.2 billion and $1.7 billion, while development starts are expected in the range of $4.5-$5.0 billion.

In June, Prologis announced that it would acquire Duke Realty (DRE - Free Report) in an all-stock transaction valued at $26 billion, including the assumption of debt. The transaction is expected to be complete in the fourth quarter of 2022.

Healthy Operating Performance: PLD is witnessing a decent operating performance. The average occupancy level in Prologis’ owned and managed portfolio was 97.6% in the second quarter. In the quarter under review, 51.3 million square feet of leases commenced in the company’s owned and managed portfolio, with 43.6 million square feet in the operating portfolio and 7.7 million square feet in the development portfolio. The retention level was 78.6% in the quarter.

Prologis’ share of the net effective rent change was 45.6% in the April-June quarter, which was led by the United States at 54.0%. The cash rent change was 27.5%. For 2022, management increased its overall market rent growth forecast to 23% on a global basis and 25% in the United States due to low vacancy and healthy demand prevailing in the market. Cash same-store net operating income grew 8.2% in the second quarter, which was led by the United States at 9.0%. Given the healthy demand for industrial properties and Prologis’ well-located portfolio, the favorable trend in its operating performance is likely to continue.

FFO Growth: Over the past three to five years, Prologis recorded FFO per share growth of 10.6% compared with the industry’s average of 0.7%. Also, the FFO per share is expected to be up 24.58% in 2022 compared with the industry’s average of 10.82%.

Balance Sheet & Cash Flow Strength: Prologis enjoys a strong balance sheet, ample liquidity and has easy access to capital. This industrial REIT exited the second quarter of 2022 with cash and cash equivalents of $437.5 million. Its liquidity amounted to $5.2 billion in cash and availability on its credit facilities. The company's weighted average interest rate on its share of the total debt was 1.8%, with a weighted average term of 9.7 years. In addition, the company’s credit ratings as of Jun 30, 2022 were A3 (Outlook Stable) from Moody’s and A- (Outlook Positive) from Standard & Poor’s, enabling the company to borrow at an advantageous rate.

Prologis’ current cash flow growth is projected at 49.66% compared with the 9.64% growth projected for the industry. Moreover, this REIT’s trailing 12-month return on equity (“ROE”) highlights its growth potential. The company’s ROE of 9.85% compares favorably with the industry’s 3.30%, reflecting that PLD is more efficient in using shareholders’ funds than its peers.

Given its balance sheet strength and prudent financial management, the company is well-poised to capitalize on growth opportunities.

Dividend: Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Prologis remains committed to that. In the first quarter of 2022, the company’s board hiked its quarterly dividend by 25.4% to 79 cents per share from the 63 cents paid earlier and has maintained its payment thereafter. Given the company’s solid operating platform, opportunities for growth and a decent financial position compared with that of the industry, this dividend rate is expected to be sustainable.

Other Stocks to Consider

Some other key picks from the REIT sector include Extra Space Storage (EXR - Free Report) and Host Hotels & Resorts (HST - Free Report) .

Extra Space Storage carries a Zacks Rank of 2 at present. Extra Space Storage’s long-term growth rate is projected at 8.2%. The Zacks Consensus Estimate for EXR’s 2022 FFO per share has been revised marginally upward in the past month to $8.30.

The Zacks Consensus Estimate for Host Hotels & Resorts’ 2022 FFO per share has moved nearly 3% upward in the past week to $1.73. HST presently carries a Zacks Rank of 2.

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.