In a rising e-commerce market, the industrial real estate asset category has grabbed headlines and continues to play a pivotal role, transforming the way how consumers shop and receive their goods. Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals. Furthermore, demand for distribution space has been rising, as e-commerce continues to expand to sectors like grocery and furniture. Also apart from e-retail, food & beverage and home improvement companies are helping drive leasing activities.
This, in turn, is spurring demand for industrial/warehouse spaces, enabling industrial landlords like Prologis Inc. (PLD - Free Report) , Duke Realty Corp. (DRE - Free Report) and Terreno Realty Corporation (TRNO - Free Report) , among others, to enjoy a favorable market environment.
Prologis remains well poised to grow, backed by its balance-sheet strength and prudent financial management. The company has also been actively banking on its growth opportunities through acquisitions and developments.
Also, shares of Prologis have outperformed the industry it belongs to in the past six months. This Zacks Rank #1 (Strong Buy) company’s shares have gained 26.3%, while the industry has recorded 5.8% growth during the same time frame. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here’s What Might Drive the Stock Higher
Rental Growth: Prologis is witnessing solid demand for its industrial real estates. Moreover, its high number of build-to-suit development projects highlights the advantageous location of the company’s land bank. The company’s share of net effective rent change was 37% in the July-September quarter compared with the prior year’s 22.6%. This was driven by the United States at 41.7%. With rents outperforming, management raised its 2019 U.S. rent growth forecast from 6% to 7%, resulting in an 80-basis-point expansion in its global rent forecast to 6.5%.
Acquisitions: Prologis’ joint venture (JV) with Norges Bank Investment Management (NBIM) has signed a deal to acquire a logistics real estate portfolio worth $1.99 billion. The 19-million-square-foot logistics real estate portfolio comprises 127 properties positioned across multiple U.S. markets. These include Southern California, San Francisco Bay Area, Seattle and Dallas. Prologis will own 55% stake in the portfolio and manage the properties on behalf of the JV.
Furthermore, this October, Prologis announced that it has entered into a definitive merger agreement with Liberty Property Trust (LPT - Free Report) to acquire the latter in an all-stock transaction, valued at roughly $12.6 billion, including the assumption of debt. The acquisition, anticipated to close in first-quarter 2020, will strengthen Prologis’ presence in target regions such as Chicago, Lehigh Valley, New Jersey, Houston, Central PA, and Southern California. Also, earlier in July, the company announced signing a definitive merger agreement to acquire warehouse owner Industrial Property Trust Inc. (IPT) in an all-cash deal valued at about $3.99 billion, including debt, from Black Creek Group.
Strong Balance Sheet: Prologis is focused on bolstering its liquidity. The company ended the quarter with leverage of 18.4% on a market capitalization basis and debt-to-adjusted EBITDA of 3.9x and $4.9 billion of liquidity. The company’s financing activities in the third quarter has helped it lower total weighted average interest rate and lengthen weighted average maturity. Being a market leader, Prologis has the ability to raise capital at favorable rates.
Superior Return on Equity (ROE): Prologis’ ROE is 6.92% compared with the industry average of 4.54%. This highlights that the company reinvests more efficiently compared with the industry.
Estimate Revision Trends: In addition, the trend in estimate revisions of 2019 and 2020 funds from operations (FFO) per share indicates a favorable outlook for the company. In fact, the Zacks Consensus Estimate for 2019 and 2020 FFO per share has been revised upward 1.2% and 4%, respectively, in two months’ time. Therefore, given the improvement on fundamentals and positive estimate revisions, there is decent upside potential to the stock.
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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