Down 26%, is Prologis still a buy?

Prologis (PLD 3.57%) delivered a stellar performance in 2021. The logistics-focused real estate investment trust (REIT) gained almost 70% last year, beating the REIT industry average of around 40%. However, the shares are down 26% from their peak this year. Most of this damage has occurred in the past two weeks.

Here’s a look at whether the stock is still a buy after the recent downtrend.

Image source: Getty Images.

What is driving Prologis’ plunge?

Shares of Prologis began their fall towards the end of April. The initial catalyst was the news that the e-commerce giant Amazon (AMZN 5.73%) now had more storage space than it needed. The company’s chief financial officer, Brian Olsavsky, said on his quarterly conference call that it now has “a chance to adapt our capacity to a more normalized demand pattern”. While the CFO said the company believes sales will eventually catch up to capacity, it plans to slow the pace of warehouse expansions in the near term.

These comments sent shockwaves throughout the industrial real estate industry, as Amazon is a major driver of demand for warehouse space. Shares of the most logistics-oriented companies Industrial REITs fell on the news:

PLD Chart

PLD data by YCharts

Meanwhile, Prologis added more weight to its stock decline in goes public with its offer to acquire another industrial REIT Duke Real Estate (DRE 3.17%). Duke rejected the $24 billion offer, saying it was not enough, although it remains open to exploring a deal, so Prologis will have to increase its offer if it is to strike a deal. Paying more money at a time when demand for industrial property could cool has prompted investors to fear that Prologis could end up eroding shareholder value in a bid for growth.

Strong believer in the future of industrial real estate

While the Amazon news spooked investors, Prologis recently released a research report pointing out that high demand is driving down available supply. The company noted three important points:

  • Competition for space is fueling record rental growth of 8.5% in the last quarter.
  • Healthy consumer spending and supply chain issues continue to drive demand for logistics real estate.
  • Material shortages make it difficult to build up a new supply.

The company noted that new supply fell short of expectations in the first quarter, pushing the vacancy rate down to a record low of 3.2%. Prologis also pointed out that all available logistics space in the United States will dry up within 16 months at the current rate of absorption. For context, there are typically 36 months of supply available in an expansion period, and rents typically continue to rise as long as there is less than 50 months of supply.

The company therefore believes that rents will continue to rise even as the industry continues to create new offerings and Amazon backs away from adding capacity. In the business to seeUS rents will rise another 22% this year.

However, Prologis does not need rents to increase to continue growing. Due to the long-term nature of its contracts, the average rent in its portfolio is currently 47% below market rates. The company has a built-in $1.6 billion uptick in annual net operating income (NOI) as these leases are renewed at the prevailing market rate, assuming no additional revenue growth. rents. This is 45% higher than the current annualized NOI rate.

At the same time, its extensive development program and its ability to make acquisitions offer additional growth potential. Prologis noted that its proposed acquisition of Duke would be accretive to its operating funds per share with significant merger synergies and substantial growth and benefit for shareholders of both companies.

An even more attractive purchase these days

With Prologis shares having lost more than a quarter of their value in recent weeks, the industrial REIT is now trading at 25 times its 2022 FFO estimate, down from more than 30 times last month. This sale also pushed its dividend yield to around 2.5%. This makes it an attractive buy, given the huge built-in growth of its legacy portfolio and the upside potential from continued rental growth, development projects and additional acquisitions.

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