The rising e-commerce market has brought the industrial real estate category into limelight, and Prologis, Inc. PLD is expected to play a vital role in revolutionizing the way how consumers shop and receive their goods. Services like same-day delivery have been gaining traction, and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals.
Companies are making efforts to improve supply-chain efficiencies, spurring demand for logistics infrastructure and enabling industrial landlords like Prologis Inc. (PLD), Duke Realty Corp. DRE, PS Business Parks, Inc. PSB and Terreno Realty Corporation TRNO, to enjoy a favorable market environment.
Particularly, Prologis is well positioned to grow supported by its solid balance sheet and sound financial management. The company is also looking to grow inorganically through accretive acquisitions and developments.
Also, shares of Prologis have outperformed the industry it belongs to in the past six months. This Zacks Rank #2 (Buy) company’s shares have gained 5.8%, while the industry declined 2.4% during the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here’s What Might Drive the Stock Higher
Rental Growth: Prologis is witnessing solid demand for its industrial real estates as reflected by the rent and occupancy level of the company’s properties. At the end of fourth-quarter 2019, occupancy level in the company’s owned-and-managed portfolio was 96.5%. Moreover, the company’s share of net effective rent change was 29.5% during the October-December period compared with the prior-year quarter’s 25.6%. This was aided by the United States at 34.1%. Moreover, its high number of build-to-suit development projects highlights the advantageous location of the company’s land bank.
Acquisitions: With healthy operating fundamentals in the industrial real estate markets, Prologis is actively capitalizing on growth opportunities through acquisitions apart from developments. This February, the company accomplished the $13-billion acquisition of Liberty Property Trust. The acquisition will strengthen Prologis’ presence in target regions, such as Chicago, Lehigh Valley, New Jersey, Houston, Central PA, and Southern California. Moreover, in January, the company completed its acquisition of warehouse owner Industrial Property Trust Inc. in an all-cash deal valued at about $4 billion, including debt, from Black Creek Group. This acquisition has expanded the company’s position in key markets, like Southern California, the San Francisco Bay Area, Chicago, Atlanta, Dallas, Seattle and New Jersey.
Strong Balance Sheet and Dividend Hike: Prologis is focused on bolstering its liquidity. The company ended the December-end quarter with leverage of 18.3% on a market capitalization basis and debt-to-adjusted EBITDA of 4x as well as $4.8 billion of liquidity. Being a market leader, Prologis has the ability to raise capital at favorable rates. Further, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Prologis remains committed to that. This February, the company’s board increased its annualized dividend rate by 9.4% to $2.32 from the $2.12 paid earlier. The increased dividend for the quarter of 58 cents will be paid on Mar 31, to shareholders of record on Mar 16, 2020.
Superior Return on Equity (ROE): Prologis’ ROE of 6.09% compares favorably with that of the industry average of 4.47%. This highlights that the company reinvests more efficiently compared with the industry.
Estimate Revision Trends: In addition, the trend in estimate revisions of 2020 and 2021 funds from operations (FFO) per share indicates an upbeat outlook for the company. The Zacks Consensus Estimate for 2020 and 2021 FFO per share have been revised upward 1.36% and 0.77%, respectively, in one month’s 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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