Amid e-commerce boom, growth of industries as well as companies opting for measures to improve supply chain efficiencies, and shifting closer to large population centers, demand for logistics infrastructure along with efficient distribution networks has been increasing. Given Prologis Inc.'s (PLD - Free Report) solid capacity, the company remains well poised to capitalize on this trend.
The company provides industrial distribution warehouse space in some of the busiest distribution markets across the globe. 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 facilitate rapid distribution of customers’ products.
In fact, in the third quarter of 2018, its cash rent change was 11.6% compared with 8.1% recorded in the year-earlier quarter. Moreover, cash same-store net operating income (NOI) registered 5.9% growth compared with the 5.4% increase reported in the comparable period last year. This was led by 7.1% growth reported in the company’s U.S. portfolio.
Moreover, with improving operating fundamentals in industrial real estate markets, Prologis is actively capitalizing on growth opportunities. In August 2018, the company completed the acquisition of DCT Industrial Trust in a stock-for-stock deal valued at $8.5 billion. The combined portfolio is enabling it to realize significant synergies and strengthen its position in key markets.
Also, in the third quarter, Prologis’ share of building acquisitions amounted to $86 million, with a weighted average stabilized cap rate of 5.0%. Development stabilization aggregated $290 million, while development starts totaled $388 million, with 34.8% being build-to-suit. Furthermore, the company’s total dispositions and contributions came in at $462 million, with a weighted average stabilized cap rate (excluding land and other real estate) of 4.9%.
Prologis’ build-to-suit activity remained solid in the year. A large number of build-to-suit development projects highlights the advantageous location of the company’s land bank, as well as demand from multi-site customers, many of whom are focused on e-commerce. These sites are positioned in urban markets that are suited for serving as the last warehouse before goods are delivered to consumers.
Prologis is focused on bolstering its liquidity. It exited the Sep-end quarter with cash and cash equivalents of $275.6 million and liquidity of $3.5 billion. Being a market leader, Prologis has the ability to raise capital at favorable rates. The company’s concerted efforts have helped beef up its USD net equity exposure, in addition to extending the debt pile’s duration and lowering weighted average interest rate. Given balance-sheet strength and prudent financial management, the company remains well poised to capitalize on growth opportunities.
However, recovery in the industrial market has continued for long, and a whole lot of new buildings are slated to be completed and made available in the market in the near term, which will lead to higher supply, as well as lesser scope for rent and occupancy growth. Any protectionist trade policy will have an adverse impact on economic growth, as well as the company’s business over the long term. The same factors are also likely to affect other industrial REITs like Liberty Property Trust (LPT - Free Report) , Terreno Realty Corporation (TRNO - Free Report) and Duke Realty Corp. (DRE - Free Report) .
Moreover, hike in interest rates can also pose a challenge for the company. Essentially, rising rates imply higher borrowing cost, which might affect its ability to purchase or develop real estate and lower dividend payouts. Moreover, the dividend payout itself might become less attractive than the yields on fixed income and money market accounts.
Prologis currently has a Zacks Rank #3 (Hold). The company’s shares have lost 9.3% of its value in six months’ time compared with the industry’s decline of 6.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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