Shares of industrial REIT Prologis PLD have surged 50.5%, so far this year, outperforming the industry’s rise of 23.1%. This marks a significant turnaround from the dismal 2018 performance, wherein the stock had lost 9%.
The Fed’s three interest-rate cuts this year, following the hike in 2018, brought good news to REIT stocks. Moreover, with individual market dynamics playing a crucial role in determining REITs’ performance, favorable conditions of the underlying asset category only pump up chances of further growth.
In fact, in a rising e-commerce market, the industrial real estate asset category is playing a pivotal role, transforming the way how consumers shop and receive their goods. Services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals. Furthermore, demand for distribution space has been rising, as e-commerce continues to expand to sectors like grocery and furniture. Also, apart from e-retail, companies are making strategic moves to improve their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks.
Given Prologis’ balance-sheet strength, the company has been well capitalizing on this favorable trend. Further, the Zacks Consensus Estimate for funds from operations (FFO) per share of this Zacks Rank #1 (Strong Buy) company has moved upward to $3.31 for 2019, suggesting a year-on-year increase of 9.24%. The trend in estimate revisions of 2020 also indicates a favorable outlook for the company and the current estimate of $3.65 for 2020 suggests 10.5% growth, highlighting analysts’ bullish view. You can see the complete list of today’s Zacks #1 Rank stocks here.
Year to Date Price Performance
Factors to Drive the Rally Next Year
The industrial real estate category has retuned more than 46% so far in the year and posted continued strong increases in FFO even in the third quarter. The asset category is further poised to excel in 2020, backed by robust fundamentals.
Per a report from CBRE group CBRE, rent growth is projected at 5% in 2020, and will be driven by newer product and infill industrial space in supply-constrained markets. There is likely to be acceleration in demand for light-industrial warehouses of less than 120,000 square feet, with e-commerce companies competing on the same-day delivery service to customers. And with space being significantly limited in the smaller-size section, growth in rent is projected to continue in the next year.
There is also an uptick in renewal rates, which is expected to continue in markets with low vacancy rates. Furthermore, lingering trade concerns will likely result in more focus on outsourcing and this, in turn, will result in growth in the third-party logistics (3PL) sector and fuel its leasing activities.
This, in turn, is likely to continue spurring demand for industrial/warehouse spaces, enabling industrial landlords like Prologis and Duke Realty Corp. DRE among others, to enjoy a favorable market environment.
Prologis remains well poised to grow in 2020, backed by solid demand for its industrial real estates and prudent financial management. Its high number of build-to-suit development projects highlights the advantageous location of the company’s land bank. With rents outperforming, management raised its 2019 U.S. rent growth forecast from 6% to 7%, resulting in an 80-basis-point expansion in its global rent forecast to 6.5%. This healthy trend is likely to continue in 2020.
The company has also been actively banking on its growth opportunities through acquisitions and developments. In November, Prologis’ joint venture (JV) with Norges Bank Investment Management (NBIM) has signed a deal to acquire a logistics real estate portfolio worth $1.99 billion. The 19-million-square-foot logistics real estate portfolio comprises 127 properties positioned across multiple U.S. markets. These include Southern California, San Francisco Bay Area, Seattle and Dallas. Prologis will own 55% stake in the portfolio and manage the properties on behalf of the JV.
In addition, this October, Prologis announced that it has entered into a definitive merger agreement with Liberty Property Trust LPT to acquire the latter in an all-stock transaction, valued at roughly $12.6 billion, including the assumption of debt. The acquisition, anticipated to close in first-quarter 2020, will strengthen Prologis’ presence in target regions such as Chicago, Lehigh Valley, New Jersey, Houston, Central PA, and Southern California.
Moreover, Prologis is focused on bolstering its liquidity. The company ended the third quarter, with leverage of 18.4% on a market capitalization basis and debt-to-adjusted EBITDA of 3.9x and $4.9 billion of liquidity. The company’s financing activities in the quarter helped it lower total weighted average interest rate and lengthen the weighted average maturity. Being a market leader, Prologis has the ability to raise capital at favorable rates and continue enjoying a favorable capital position in 2020.
Finally, 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 10% to $2.12 from the $1.92 paid earlier. Given the robust capital position and lower dividend payout ratio compared to its peers, Prologis will likely be able sustain its capital-deployment activities and continue boosting shareholder value.
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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