Prologis: the silver lining (NYSE: PLD)




In the world of business and investing, high interest rates dominated the headlines for much of the year, and no one likes higher rates except banks and corporations. insurance. Higher rates are also seen as negative for REITs, which rely on debt and equity markets to finance growth, and whose dividend yields compete with those offered by treasury bills and bonds.

This brings me to Prologis (New York stock market :PLD), which, as shown below, is now trading well below its 52-week high of $174, and whose share price is down a massive 24% in the past 12 months. In this article, I outline why market worries are overblown and why PLD should thrive even in today’s high interest rate environment, so let’s get started.

Why PLD?

Prologis is a global logistics leader and the largest publicly traded REIT focused on owning industrial properties in high-growth, high-barrier-to-entry markets. Currently, PLD’s footprint spans 1.2 billion square feet of gross leasable space in 19 different countries, serving 6,300 tenants across B2B and retail fulfillment needs. /on line.

As shown below, PLD serves the biggest names in their respective industries, including logistics leaders DHL, UPS (UPS) and FedEx (FDX), as well as retail giants Amazon (AMZN), Walmart (WMT), Home Depot (HD), and consumer companies 3M (MMM) and PepsiCo (DYNAMISM), to only cite a few.

pld shares

PLD tenants (Investor Presentation)

Meanwhile, PLD posts record results, FFO per share at $1.73, beating the consensus estimate of $1.66. This is due to a historically low vacancy rate environment for industrial properties. Portfolio occupancy improved 110 basis points year-over-year to 97.7% and same-store NOI increased 9.3%.

While high interest rates have posed an overall risk for Prologis and REITs in general, the silver lining for PLD is that it affects all players in the space, and those with the strongest balance sheets are well placed. to thrive in any environment. This is supported by PLD’s strong balance sheet, as it is one of the few REITs with an A credit rating from S&P, and it boasts a low debt-to-EBITDA ratio of just 4.3x.

A sign of the bond market’s appetite for PLD’s debt in a high interest rate environment, it was able to raise $3.1 billion in debt during the third quarter at a weighted average interest rate of barely 3.6% with a weighted average maturity of 7.5 years. Year-to-date, PLD and its co-investment ventures have raised a staggering $10.8 billion in debt at a weighted average interest rate of just 2.6% with an average term of 7 years.

In addition, higher interest rates mean that weaker competitors, both public and private, are unable to do new construction, further increasing the value of existing real estate in the supply constrained markets in which PLD operates. This is reflected in the high relocation spreads of 59.7% that PLD saw in the third quarter. Additionally, recently acquired Duke Realty properties have a significant advantage with from one market to another rental potential. The supply-constraining dynamic induced by higher rates was noted by management during the recent conference call:

It is important to recognize where supply is being delivered, as our submarket location strategies minimize our exposure to new supply. For example, in our US coastal markets where we generate over 50% of our global NOI, vacancies are only 1.7%. Geographically, we are focusing more on Europe given the ongoing war and growing energy crisis.

As we report record results, including an occupancy rate of 98.6% in a market with a vacancy rate of 2.4%, we are monitoring conditions closely. Customers are cautious about rising energy costs, which could create near-term demand headwinds. That said, we also believe that new supply will now decline by around 15% in 2023, which should support occupancy.

Meanwhile, PLD pays out a well-supported dividend yield of 2.8%, which comes with a reasonably low payout ratio of 56%. While the yield is nothing out of the ordinary, it comes with a high dividend CAGR of 11.5% over 5 years and 8 consecutive years of growth.

Admittedly, PLD is no longer as cheap as it was when it traded at around $100 during the month of October. However, I continue to see the stock value at the current price of $114.66 with a forward P/FFO of 22.4. This takes into account the estimate 23% FFO/share growth priced in, 9% FFO per share growth analysts expect next year and overall company quality. Analysts have a consensus Buy rating on the stock with an average price target of $135, implying a potential total return of 21%, including the dividend.

Key takeaway for investors

Prologis is a solid industrial REIT that sleeps well at night due to its global presence, high-quality asset base and industry-leading balance sheet. This allows it to raise debt at attractive interest rates in the current macroeconomic environment. Additionally, it should benefit from its tight supply markets as new construction costs soar along with the higher cost of debt. I find PLD to be reasonably priced right now for potentially strong long-term returns.

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