Prologis Inc. PLD is well-positioned to bank on the favorable industrial real estate market environment, backed by its solid operating platform and robust scale. The company, which has emerged as a market leader in this asset category, is witnessing solid demand for its industrial real estate, as reflected by the leasing, rent and occupancy levels of the properties.
Undoubtedly, with the e-commerce boom, growth in industries and companies making efforts to improve supply-chain efficiencies, the demand for logistics infrastructure and efficient distribution networks has risen. This is aiding the industrial real estate market to prosper and benefit Prologis, STAG Industrial, Inc. STAG and First Industrial Realty Trust, Inc. FR.
Resilience is essential to the future of the supply chains. Therefore, over the long term, apart from the fast adoption of e-commerce, logistics real estate is expected to benefit from an increase in inventory levels, offering possibilities to industrial landlords, including Prologis, STAG Industrial and First Industrial Realty, to enjoy a favorable market environment.
Prologis, in particular, has been witnessing a decent operating performance. The average occupancy level in Prologis’ owned and managed portfolio was 98% in the first quarter of 2023. Further, 49.7 million square feet (msf) of leases commenced in the company’s owned and managed portfolio, with 41.6 msf in the operating portfolio and 8.1 msf in the development portfolio. The retention level was 77.2% in the quarter.
Prologis’ share of net effective rent change was 68.8% in the January-March quarter, which marked an all-time high and was led by the United States at 78.8%. The cash rent change was 41.9%, representing an all-time high.
Cash same-store net operating income (NOI) grew 11.4% in the first quarter and denoted an all-time high. For 2023, management expects cash same-store NOI (Prologis share) of 9-9.75%.
With healthy operating fundamentals in the industrial real estate markets, Prologis has capitalized on growth opportunities through acquisitions and developments. Prologis’ 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. For 2023, the company anticipates acquisitions at Prologis share between $300 million and $600 million, whereas development starts are expected to be $2.5-$3 billion.
Prologis is focused on bolstering its liquidity. The company boasts a liquidity position of $6.7 billion, inclusive of $1.0 billion of additional line of credit capacity closed in April. Given its balance sheet strength and prudent financial management, PLD is well-poised to capitalize on 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 12.87%. Check Prologis’ dividend history here.
However, with the asset category being attractive in these challenging times, there is a development boom in a number of 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.
The stabilization of e-commerce sales growth raises concerns for Prologis. Moreover, a hike in the interest rate is concerning for PLD. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. Further, the dividend payout may become less attractive than the yields on fixed-income and money market accounts.
Shares of this Zacks Rank #3 (Hold) company have rallied 17.0% in the past six months compared with the industry’s growth of 1.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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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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