Prologis (PLD Quick QuotePLD - Free Report) is well-poised to capitalize on favorable conditions in the industrial real estate market due to its strong operational foundation and substantial scale. As a prominent player in this asset class, the company is experiencing robust demand for its industrial real estate offerings, as evidenced by the strong performance in leasing, rental rates and property occupancy levels.

Due to the surge in e-commerce, the expansion of various industries and continuous endeavors to enhance supply-chain effectiveness, there has been a notable increase in the need for logistics infrastructure and streamlined distribution networks. This upswing is contributing to the thriving state of the industrial real estate market, which is proving advantageous for companies like Prologis, STAG Industrial (STAG Quick QuoteSTAG - Free Report) and First Industrial Realty Trust (FR Quick QuoteFR - Free Report) .

The future of supply chains hinges on their ability to remain resilient. Consequently, in the long run, apart from the fast adoption of e-commerce, logistics real estate is expected to benefit from an increase in inventory levels. This opens up opportunities for industrial property owners, including Prologis, STAG Industrial and First Industrial Realty, to thrive in a favorable market environment.

In particular, PLD provides industrial distribution warehouse space in some of the busiest distribution markets worldwide. The properties of the company are typically located in large, supply-constrained infill markets in close proximity to airports, seaports and ground transportation facilities, which facilitates the rapid distribution of customers’ products. The solid demand for Prologis’ strategically located facilities has driven healthy operating performance over the past few quarters.

In the second quarter of 2023, 43.3 million square feet (msf) of leases commenced in the company’s owned and managed portfolio, with 38.4 msf in the operating portfolio and 4.9 msf in the development portfolio. The average occupancy level in Prologis’ owned and managed portfolio remained high at 97.5%.

For 2023, management expects occupancy in the band of 97.0-97.5%. We estimate the metric to be 97.1%. Also, our estimate points to a year-over-year increase of 36% in rental revenues in the current year.

With healthy operating fundamentals in industrial real estate markets, Prologis has capitalized on growth opportunities through acquisitions and developments. Its investments over the years comprise a wide array, including the largest M&A transactions in the real estate sector and individual off-market deals below $5 million.

In June 2023, it concluded the buyout of nearly 14 million square feet of industrial properties from opportunistic real estate funds affiliated with Blackstone for cash consideration of $3.1 billion. The move significantly enhanced Prologis’ presence in the key U.S. markets, poising it well for long-term growth. Last year, PLD closed the acquisition of Duke Realty, thereby boosting its presence in the key markets of the United States.

In the first half of 2023, the company’s share of building acquisitions amounted to $172 million. Development stabilization aggregated $1.47 billion, while development starts totaled $411 million. For 2023, the company anticipates acquisitions at Prologis share between $300 and $600 million, while development starts are expected in the range of $2.5-$3 billion.

PLD maintains a healthy balance sheet position with ample flexibility. This industrial REIT’s liquidity amounted to $6.4 billion in cash and availability on its credit facilities as of Jun 30, 2023. In addition, the company’s credit ratings as of Jun 30, 2023 were A3 (Outlook Stable) from Moody’s and A (Outlook Stable) from Standard & Poor’s, enabling the company to borrow at an advantageous rate. Given its balance sheet strength and prudent financial management, the company is well-poised to capitalize on long-term growth opportunities.

Moreover, solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Prologis is committed to that. In the last five years, Prologis has increased its dividend five times, and its five-year annualized dividend growth rate is 13.43%. Check Prologis’ dividend history here.

Analysts seem bullish regarding PLD’s funds from operations (FFO) growth prospects. The Zacks Consensus Estimate for the company's 2023 FFO per share has been revised marginally upward over the past seven days to $5.59. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of this industrial REIT have rallied 5.5% over the past year against the industry’s decline of 10.0%.

Image Source: Zacks Investment Research

However, with the asset category being attractive even during challenging times, there is a development boom in many markets. The high supply is likely to fuel competition and curb pricing power. New supply is likely to create pressure on vacancy levels and rent growth to some extent in the upcoming quarters. Furthermore, recovery in the industrial market has continued for long, and the growth of e-commerce sales is likely to stabilize to some extent in the upcoming quarters.

Moreover, a high interest rate is a concern for Prologis. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. Further, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts.

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.