We have recently upgraded our recommendation for Prologis Inc. (PLD), a leading industrial real estate investment trust (REIT), to Neutral from Underperform as we anticipate it to perform in line with the broader market.
The change in recommendation is also driven by the fact that the company has reported strong third quarter 2011 results. Prologis reported third quarter 2011 fund from operations (FFO) of $0.45 per share compared with $0.48 in the year-earlier quarter. Fund from operations, a widely used metric to gauge the performance of real estate investment trusts (REITs), is obtained after adding depreciation and other non-cash expenses to net income.
Recurring FFO for the reported quarter was $0.44 per share compared to $0.33 in the year-ago quarter. The third quarter 2011 recurring FFO beat the Zacks Consensus Estimate by $0.05. Total revenues during the reported quarter were $501.4 million compared to $228.6 million in the year-ago quarter. Total reported revenues were well ahead of the Zacks Consensus Estimate of $433 million.
Prologis acquires, develops, operates and manages industrial real estate space in North America, Asia and Europe. Prologis had merged with the erstwhile namesake company in an all-stock deal to become a behemoth of sorts in the industrial real estate sector.
The combined entity has brought together two of the most complementary customer franchises on the same platform and created a $44 billion asset pool at the time of merger. The merger is expected to lead to potential cost savings through operational synergies and would help create a stronger platform for value creation and sustainable growth in the long term.
Prologis 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 at close proximity to airports, seaports, and ground transportation facilities, which enable rapid distribution of customers’ products. This has enabled the company to gain a significant pricing advantage over its competitors.
Furthermore, Prologis has significantly reduced operating risks through continued lease-up of its development portfolio. The gradual revival of the economy is expected to support industrial demand in the long-run, improving occupancy and rental rates. This provides a strong upside potential for the company.
However, the credit crunch has widened the bid-ask spread between buyers and sellers of commercial real estate, which has caused deal volumes to fall compared to pre-recession levels. In addition, market vacancy increases will mitigate Prologis’ ability to push through rental rate increases, and is expected to affect its long-term growth.
Currently, Prologis shares maintain a Zacks #3 Rank, which translates to a short-term ‘Hold’ recommendation. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for First Industrial Realty Trust Inc. (FR), one of the competitors of Prologis.
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PROLOGIS INC (PLD): Free Stock Analysis Report
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