Prologis, Inc. (NYSE: PLD) recently reported its Q3-2022 results, with the industrial REIT’s performance coming in very strong, backed by its multi-year leases and excellent occupancy rates. The company is set to end the year with record top and bottom line numbers, which, combined with its overall qualities and the stock’s corrected valuation, comprises what appears to be a fruitful investment case. Accordingly, I am bullish on the stock.
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Q3-2022 Results: Vigorous Momentum Endures
Due to the ongoing macroeconomic turmoil, most investors have been bracing for an economic slowdown. In turn, this is expected to result in declining demand for industrial properties, including those of Prologis.
However, Prologis’ rental revenues are currently being supported by multi-year leases attached to its diversified portfolio. Specifically, the company’s weighted average lease term stood at 4.1 years at the end of Q3, with a great number of leases signed at excellent rates during the pandemic when industrial properties were in sky-high demand amid the supply-chain bottlenecks at the time.
I believe this particular lease term is fantastic, as it’s long enough to protect the company from the ongoing headwinds over the short-to-medium term and temporary enough for the company to renegotiate attractive leases in the coming years. That is, of course, assuming the ongoing market madness doesn’t last more than a year or two, moving forward.
In any case, Prologis’ current lease profile resulted in revenues growing 48.3% to $1.75 billion and funds from operations (also known as FFO, the cash flow from a real estate company) per share rising 66% to $1.73. While rental revenues actually grew 10.6% to $1.16 billion, the top line was uplifted by $595 million related to strategic capital revenues. For context, strategic capital revenues were just $141 million last year.
The most important metric here is the growth in FFO/share, as it illustrates that rental revenue growth was not just boosted by acquisitions through share issuance but that, in fact, Prologis’ investments are accretive to shareholder value creation.
Prologis’ occupancy rate also remained at an excellent 97.7%, while the midpoint of management’s FFO/share guidance ($5.13) points towards another record year in terms of profits. Specifically, it implies growth of 23.6% compared to Fiscal 2021, which is quite impressive considering that FFO/share had also reached an all-time high last year following Prologis’ pandemic-driven leases.
The company’s balance sheet was maintained quite healthy, too, with total debt as a percentage of its total market cap standing at a reasonable 20.7%. The REIT’s weighted average borrowing rate remains relatively low as well, at 1.9%, exemplifying the soundness of its balance sheet.
Have Shares Become Cheaper Following the Stock’s Decline?
Prologis growth has been admittedly impressive, but shares had also become considerably expensive last year. To illustrate how expensive the stock was, even with FFO/share set to grow by roughly 23.6% this year and shares already down almost 40% from its 52-week highs, Prologis is still trading at a forward P/FFO of 22x.
Now, rising rates impact the valuation of equities. This is especially true for REITs as they frequently utilize debt along with equity to finance their expansion. In that regard, I would normally find the aforementioned multiple somewhat hefty in the current environment.
However, considering the company’s overall qualities, including its multi-year leases, tremendous occupancy rates, ability to attract below-average financing rates (it’s the U.S.’s largest industrial REIT by far), and skilled management team with a proven track record of excellent performance, I believe Prologis is currently trading at a reasonable valuation. Its valuation is definitely not a cheap one, but the modest premium is acceptable in this case, in my view.
Do Prologis Dividend-Growth Prospects Remain Strong?
Following the recent correction in Prologis’ valuation, the stock’s yield has now advanced to 2.85%, which should make for a strong base yield considering that the REIT’s dividend-growth prospects remain quite promising.
Despite the latest dividend hike being by a remarkable 25.4%, the stock’s payout ratio still stands at a healthy 62% based on management’s guidance. It should provide ample room for future increases to be sustained in the double-digits, especially given Prologis’ firm lease profile.
What is the Target Price for PLD Stock?
As far as Wall Street’s sentiment goes, Prologis maintains a Strong Buy consensus rating based on 15 unanimous Buys assigned in the past three months. At $132.79, the average Prologis stock price prediction suggests 19.9% upside potential.
Conclusion: An Attractive Dividend-Growth Opportunity
Following the stock’s correction over the past year, Prologis appears to have become an attractive dividend-growth pick. The company’s latest results were very strong, management’s guidance is optimistic, and the 2.85% yielding dividend remains well-covered, leaving plenty of room for further hikes, moving forward.
Shares may not be particularly cheap, but given Prologis’ historical tendency to trade a premium against its industry peers along with its overall qualities, it’s hard to tell if there is going to be a better opportunity for investors to buy this name anytime soon.
