An Industrial REIT Opens Q2 Season With Good News

chart01.pngLast Tuesday, Prologis, the largest industrial REIT with a market cap of $27 billion, officially opened the Q2 season for U.S. equity REITs with good news. Although the stock fell flat following the release, the results were better than expected, crowning a year-to-date return of about 21%. For us, one of the most important results were upping the same-store NOI midpoint growth for 2016 to 5%.

The 2016 increase of same-store NOI is an indication that industrials have not yet their reached saturation point. The 5% growth is just slightly lower than last year’s numbers. Same-store metrics allow investors to determine what portion of growth has come from existing properties and what portion can be attributed to the opening of new stores. Prologis, with its large number of properties, gives us a fairly clear indication that the industry growth is still coming from within.

Investors realized that the company’s exposure to the UK was minimal, a realization that was reinforced by CEO Hamid Moghadam during the Q2 release call. When the Brexit results were announced, the stock fell more than 5% in the following days before and then recovering to the current level of $51. 28% of Prologis’ square feet are located abroad, so initial concerns regarding the potential impact on the company were valid. However, it turns out that the UK actually makes up less than 3% of their portfolio.

You really cannot go wrong with Prologis. This is a global, large cap with lower volatility and a diversified portfolio that has experienced management and enjoys an investment grade credit rating. However, with the recent rally, it is becoming increasingly harder to extract any upside and stock appears to be in the right place.

In conclusion, we cannot say for sure that Prologis is right for your portfolio, but we definitely see Prologis as a good fit for anyone looking for a lower return, lower risk investment.

Source: Prologis, Inc.(NYSE:PLD)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, and CLDT.

Another Industrial REIT Delivers Good Results

 

chart01

  1. Industrial REITs has continuously delivered good results and it doesn’t appear that this is going to change in 2016.
  2. Like Prologis, EastGroup Properties reported a double digit rent releasing spread in Q1.
  3. EastGroup has been distributing the same or increased dividends for the last 24 years in a row, which is definitely a good record among industrial REITs.
  4. Despite its Texas concentration, conservatism has been a mark in the management.
  5. Multiples indicate the stock has been at least correctly priced or overpriced.

As we pointed out in last week’s Prologis article, industrial real estate has been delivering good results and it doesn’t appear that 2016 will be any different (click here). In this context, EastGroup Properties has positioned itself for moderate growth and a good track record. By the way, it is one of two industrial REITs that has been distributing same or increased dividends for 24 years. EastGroup’s dividend has accumulated a CAGR in the range of 3-4%.

Like Prologis, rental change for new leases and renewals has been strong in Q1. EastGroup reported a 16.5% GAAP releasing spread, which is their record. That translated into a mild same store property net operating income growth of 2.2%.

In fact, EastGroup is an entirely different kind of animal when compared to Prologis. It is a midsized market cap REIT (approximately $2 billion), focused on a couple of states in the southern part of the US. Their properties are multi-tenant business distribution buildings close to major transportation routes that cater to tenants who are in need of industrial properties in the 5-50k square feet range.

chart02Naturally, its Texas concentration, specifically in the Houston area (19% of portfolio), has been a concern due to the instability in the oil industry. Given that its occupancy has held steady, we cannot affirm they’ve been strongly impacted, but it has certainly called management’s attention to a broader diversification in their portfolio. EastGroup’s top ten tenants account for less than 10% of the portfolio. Being exposed to a single tenant isn’t a concern here.

This Jackson, MS based REIT has a tradition in development. 39% of its portfolio has been developed by the company, which has proudly been around since 1969 and whose most recent configuration dates backs to the 1980s. Home grown talent seems to be the rule here, as its newest CEO first joined the company as an intern. In addition, some of the senior executives have been with the company for a long time.

chart03Conservatism is definitely one of the company’s features that is also reflected in its dividend policies. Over the past 15 years, the company has maintained a dividend payout ratio in the 60s and 70s. Recently, the ratio has been around 66%.

Its debt profile could be better, since its debt to adjusted EBITDA has been above 6.0. Nonetheless, the company has a BBB credit rating from Fitch and Baa2 from Moody’s and its debt to total market capitalization around a third.

Like a large part of the REIT industrials, the fundamentals have been dependent on GDP performance so it comes as no surprise that the stock is correlated to S&P500. EastGroup has accompanied the market in its ups and downs. Most importantly, the stock has rebounded over and over. In addition, its AFFO multiple has been flying high at around 22x. In turn, its FFO multiple has been around 16x, still higher than historic norm. The stock is definitely not cheap.

For that reason, the company may revise its decision not to issue equity. The company minimized equity issuance in 2015 and their current position is that they don’t expect new issuances this year. They are planning to sell the least strategic properties (including some in Houston) and reinvest in the development.

Source: Prologis, Inc.(NYSE:PLD), EastGroup Properties Inc.(NYSE:EGP), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Prologis Q1 Results Reinforce Logistics Strength

 

chart01

  • 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)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Prologis, Class A Industrial REIT

logo

Prologis, Inc. (NYSE:PLD) is the largest industrial REIT, with an approximate $21 billion market capitalization. Despite the high valuation metrics, Prologis was one of best performers in Q1 2015 in comparison with its Industrial REIT peers. It leases 2,845 distribution facilities to over 4,700 customers. Most of its buildings — 74 percent are in North and South America, followed by Europe and Asia. The company bases its strategy on the ever-increasing demand for high-quality distribution facilities throughout the world; land banking in well-positioned locations for development or land sales; and economy of scale.

Prologis either owns outright, or has investments in, properties and development projects expected to amount to around 594 million square feet in 21 countries through two segments. Real Estate Operations segment manages the ownership of industrial properties and Strategic Capital segment manages co-investment ventures and other unconsolidated entities. Prologis’s weighted average ownership is approximately 32 percent.

countries

The company has a broad and diverse tenant basis, including multinational corporations that bring them repeat business across our portfolio. They cater to gobal-trade-linked businesses that seek efficient shipment of goods across the global supply chain. Top customers include Amazon, Home Depot, Wal-Mart and FedEx Corporation. The top tenant, DHL Express, contributed two percent of Prologis’s net effective rent.

The results of the first quarter of 2015 compared to the same period the previous year were strong:

  • Total revenues increased by six percent.
  • Occupancy in the operating portfolio went by 140 basis points to 95.9 percent occupancy.
  • Same-store NOI for owned and managed portfolio increased 3.9 on an adjusted-cash basis (4.2 for Prologis share only).
  • Core funds from operations and dividends increased fourteen and nine percent respectively.
  • Credit ratings have been stable at Moody’s Baa1 and Standard & Poor’s BBB+. Most of their debt is fixed-rate and unsecured. The debt-to-capitalization ratio is about 30 percent.

op metrics

From a valuation perspective, the FFO multiple is around 20 and the dividend yield is 3.6. Definitely, Prologis is worth including on the watchlist.

Signup button

Source: Prologis


Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​