The industrial real estate investment trust (REIT) – Prologis Inc. (PLD) – closed the Prologis North American Industrial Fund III. The move comes as part of its efforts to realign its portfolio, trim down a non-strategic fund and enhance its platform in existing markets.
Structured as an 80/20 equity partnership with Lehman Brothers Holdings Inc., this Prologis fund had a portfolio comprising 82 properties across the United States, spread over 17.7 million square feet. The fund was concluded and its assets were sold in two deals.
The first one was a third-party sale and it included 64 properties spanning 9.5 million square feet in Reno, Nevada. The second deal included a stabilized, Class-A portfolio of 18 properties. Spanning 8.1 million square feet in Central and Eastern Pennsylvania, Southern New Jersey and Las Vegas, Nevada, these properties were acquired by Prologis. As of Jul 31, 2013, this portfolio consisting of 18 properties had occupancy of 95.4%.
Last month, Prologis delivered a positive earnings surprise of about 7.9% for the second quarter of 2013. The company reported core FFO (funds from operations) per share of 41 cents, beating the Zacks Consensus Estimate of 38 cents. Prologis’ strategic measures and capital market moves have helped enhance flexibility, extend maturities and lower interest expenses.
We believe that the portfolio restructuring moves would further help it grow its top line. In fact, with a rise in e-Commerce application and supply chain consolidation, there is an increasing demand for Class-A facilities and Prologis stands to benefit as it has the capacity to offer modern distribution facilities in strategic infill locations.
Yet, with sluggish economic growth, we are not overtly optimistic on this Zacks Rank #3 (Hold) stock and believe that the risk/reward profile is currently balanced. Market vacancy increases may reduce its ability to push through rental-rate increases. Also, rising interest rates could increase its cost of financing.
Other REITs that are performing well and deserve a look include Chesapeake Lodging Trust (CHSP), Winthrop Realty Trust (FUR), both carrying a Zacks Rank #1 (Strong Buy) and Highwoods Properties Inc. (HIW) that has a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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