- Prologis’ recent Q1 results reinforce the thesis that industrials are still in the expansion phase of the cycle.
- With a $24 billion market cap, Prologis is a reference point in the Logistics Real Estate sector.
- By any standard, 2015 was a year of records for Prologis. The question, though, is if they will be able to top it in 2016.
- So far, the REIT has been successful in accomplishing its goal of capitalizing rent growth.
Some analysts believe that a good way to vet a sector is by performing a bottoms-up analysis, looking at individual stocks. If you follow this logic and start browsing Prologis’ Q1 figures, the first REIT to release results among its peers, the sector of logistics real estate appears to be on a continuous rise. Focusing on the same property net operating income, a growth rate of 7.4% in Q1 is pretty solid compared to figures in the past.
With a $24 billion market cap, Prologis is a reference point in the sector and is, therefore, a good company to start with. The company has a well-diversified customer base of more than 5,000. What’s more is that their top 10 customers represent only 13% of net effective rent. Prologis also has an international component and it has sourced its growth from the expansion of e-commerce- both domestically and internationally.
Another key factor in the company’s success is that they have a high repeat clientele, demonstrating high customer retention in the mid-80s. For the sake of comparison, a growing logistics peer like STAG had a retention rate of 42% in Q1, even for a good size of expiring of square footage. Even if you compare their historical data, STAG’s retention rate has averaged around the high 60s. In analysis, Prologis has been able to maintain consistent and high levels of customer satisfaction.
Prologis’ management described 2015 as the best year ever. Indeed, almost 97% of the company’s real estate was occupied by the end of 2015. Nevertheless, the natural question is whether they will be able to keep up this momentum. The answer is yes! Well, at least in Q1.
Core FFO per share went up by 24%. Also, the company has a strong balance sheet with debt to adjusted EBITDA under 6x and debt to gross market capitalization of 34%. It is important to note that the debt is mostly unsecured and fixed. Furthermore, the company is well on its way to an A credit rating.
An important item in Prologis’ goals, which is also a sign of portfolio strength, is rent growth of the new lease compared to the prior lease for the same space. In Q1, they achieved a 20% increase, which is explained when you replace leases originated during low rent periods following the global financial crisis.
Although, I have been highlighting Prologis’ success throughout the article, there’s usually no success without defeat. In fact, last year, as well as early this year, the company suffered some misfortunes in the financial markets. Following an intense period of volatility, their share price tanked- reaching a low last February. However, the volatility reduction in the last two months have helped the share price reach an AFFO multiple of 20. Also, dividend yield is below equity REIT average.
In summary, Prologis is worth leaving in an investor’s watch list (as opposed to buying it) as this REIT has become overpriced.
Source: Prologis, Inc.(NYSE:PLD), STAG Industrial, Inc.(NYSE:STAG)
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