Industrial REITs have been firing on all cylinders and per a study by the commercial real estate services firm — CBRE Group Inc. (CBRE - Free Report) — availability fell for 31 straight quarters to 7.3% for the U.S. industrial market in Q1. Moreover, with demand surpassing new supply, net asking rents climbed 1.9% in the quarter to $7.01 per square foot, marking the highest level since 1989.
In fact, companies are now compelled to enhance and renovate their distribution and production platforms, in order to support e-commerce business, address a large customer base and urbanization. Services like same-day delivery are gaining traction, propelling demand for modern distribution facilities. Also, last-mile properties are witnessing a solid increase in asset values.
However, not all industrial REITs are equally poised to excel. Rather, only the ones with solid capacity and healthy fundamentals remain well poised to capitalize on this trend.
One such stock is Prologis Inc. (PLD - Free Report) . This Zacks Rank #2 (Buy) stock has risen 15.4% in a year’s time, against its industry’s decline of 3.6%. There is further scope for solid price appreciation given the REIT’s sound fundamentals and improving prospects.
In fact, in April 2018, Prologis announced that it has entered into a definitive agreement with DCT Industrial Trust Inc. (DCT - Free Report) to acquire the latter in an $8.4-billion stock-for-stock deal, including debt assumption. Notably, the deal, which is anticipated to create near-term synergies of nearly $80 million, was unanimously approved by both companies’ board of directors. DCT shareholders will be given 1.02 shares of Prologis in exchange of each DCT share. The transaction, subject to other customary closing conditions, is expected to close in third-quarter 2018.
Moreover, backed by solid operating results, Prologis put up a stellar show in first-quarter 2018. Net effective rent change improved in the quarter, while period-end occupancy remained high. This industrial REIT also raised its guidance for 2018 core funds from operations (FFO) per share.
What Makes Prologis a Solid Choice?
Revenue Strength: Prologis’ top line has been displaying strength for the past several quarters. In fact, since first-quarter 2015 through first-quarter 2018, the company reported better-than-expected revenue figures in each quarter. Given the strength in its fundamentals, this upbeat trend is likely to continue ahead.
Cash Flow Growth: Prologis enjoyed a historical cash flow growth (3-5 years) of 22.3%, which comfortably exceeded the industry’s growth of 17.3%. Also, the company’s current cash flow growth of 19.1% is way ahead of the industry’s rate of 6.2%. Finally, the company exited first-quarter 2018 with more than $3.6 billion of liquidity.
FFO per Share Growth: Prologis witnessed 14.9% growth in FFO per share, over the last three-five years, against 6.3% of that of the industry. In addition, its FFO per share is estimated to grow at the rate of 7.1% for the current year, ahead of 3.1% of that of the industry.
Strong Leverage: The debt-to-equity ratio for Prologis is 0.51 compared with the industry average of 0.84. This highlights greater financial stability of the company and lesser risk for shareholders.
Superior ROE: Prologis’ Return on Equity (ROE) is 9.86% compared with the industry’s average of 4.9%. This indicates that the company reinvests more efficiently compared to the industry.
Estimate Revisions: The stock has seen the Zacks Consensus Estimate for current-year FFO per share being revised 0.7% upward to $2.98 in a month’s time. Also, the Zacks Consensus Estimate for the next year has been revised north, over the past three months. This reflects analysts’ bullish sentiments on the stock.
Going forward, with a recovering economy and job market gains, as well as tax reforms, consumption levels are anticipated to remain elevated. And with a healthy manufacturing environment and high business inventories, demand for warehouse and logistics real estate will likely be high. Given Prologis’ solid capacity, it remains well poised to capitalize on this trend.
Other Stocks to Consider
Other similarly-ranked stocks in the REIT space include Chatham Lodging Trust (CLDT - Free Report) and Host Hotels & Resorts, Inc. (HST - Free Report) , each carrying a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Chatham Lodging Trust’s Zacks Consensus Estimate for 2018 FFO per share rose 1% to $1.93 over the past month. Its shares have returned 12.9% in the past three months.
Host Hotels & Resorts’ FFO per share estimates for 2018 witnessed a rise of 3.6%, moving up to $1.72, in a month’s time. The stock has gained 17.1% during the past three months.
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.
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