Company Reports

No-moat-rated Prologis reported a disappointing set of numbers in the first quarter as net effective same-store NOI growth slowed down quite a bit on a sequential basis. The shares of the company were down about 7% in response to the results. The firm reported core funds from operations, or FFO, of $1.28 per share, 4.9% higher than the $1.22 in FFO during the first quarter of 2023. The fundamentals for the industrial sector are now showing clear signs of a slowdown as the interest-rate environment is starting to have an impact. We are reducing our fair value estimate for Prologis to $120 from $128 per share after incorporating first-quarter results.

Prologis acquires, develops, owns, and operates industrial properties that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry, typically near large labor pools and extensive transportation infrastructure. The firm's strategy is to leverage the organizational scale of its 1.2 billion square foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele. The firm's strategically located global land bank has the potential to support the lucrative development of approximately $37 billion of new industrial projects in upcoming years.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

PPrologis acquires, develops, owns, and operates industrial properties that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry, typically near large labor pools and extensive transportation infrastructure. The firm's strategy is to leverage the organizational scale of its 1.2 billion square foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele. The firm's strategically located global land bank has the potential to support the lucrative development of approximately $37 billion of new industrial projects in upcoming years.

No-moat-rated Prologis reported a good set of numbers in its fourth-quarter results as the firm recorded core funds from operations, or FFO, of $1.26 per share, 1.6% higher than the $1.24 in FFO generated during the fourth quarter of 2022. Excluding promote income (revenue earned from third-party investors net of related compensation expenses, taxes, and foreign currency derivative gains or losses) within the strategic capital segment, which tends to be lumpy, the company reported core FFO of $1.29 per share, 4.8% higher than the $1.23 in FFO reported in the year-ago period.

No-moat-rated Prologis reported a decent set of numbers in its third-quarter results. The firm reported core funds from operations, or FFO, of $1.30 per share, 25% lower than the $1.73 in FFO during third-quarter 2022. The sharp decline in FFO during the third quarter can be mainly attributed to the promote income within the strategic capital segment that tends to be lumpy. We think that investors should analyze the underlying performance of the industrial portfolio of the company after excluding the strategic capital segment. Real estate operations, which excludes the strategic capital segment, reported a core FFO of $1.26 per share in the third quarter, which was 20% higher on a year-over-year basis. We are maintaining our $124 per share fair value estimate for Prologis after incorporating the third-quarter results.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

No-moat-rated Prologis’ second-quarter results were in line with our expectations as the firm reported core funds from operations, or FFO, of $1.83 per share, 65% higher than the $1.11 in FFO during the second quarter of 2022. The sharp rise in FFO during the second quarter can be mainly attributed to the promote income in the strategic capital segment. The real estate operations of the company, which exclude the strategic capital segment, reported a core FFO of $1.18 per share in the second quarter, 18% higher on a year-over-year basis. We are maintaining our $124 per share fair value estimate for Prologis after incorporating the second-quarter results.

Prologis acquires, develops, owns, and operates industrial facilities that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry, typically near large labor pools and extensive transportation infrastructure. The firm's strategy is to leverage the organizational scale of its 1.2 billion square foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele. The firm's strategically located global land bank has the potential to support the lucrative development of approximately $35 billion of new industrial projects in upcoming years.

No-moat-rated Prologis reported decent results in the first quarter with the firm reporting core funds from operations, or FFO, of $1.22 per share, 12% higher than the $1.09 in FFO during the first quarter of 2022. The real estate operations reported a core FFO of $1.16 per share in the first quarter, which was 16% higher on a year-over-year basis, whereas the core FFO in the strategic capital segment was reported at $0.06 per share compared with the $0.09 per share reported a year ago. The strength in the industrial sector over the past few years is evident from the fact that the net effective re-leasing spread for the leases signed in the first quarter was 68.8%. Although the re-leasing spreads are still exceptionally high for top-notch industrial real estate, we think that the growth in market rents will moderate in the near to medium term largely because of the weaker macroeconomic backdrop. We are maintaining our $124 per share fair value estimate for Prologis after incorporating the first-quarter results.

Prologis acquires, develops, owns, and operates industrial facilities that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry, typically near large labor pools and extensive transportation infrastructure. The firm's strategy is to leverage the organizational scale of its 1 billion square foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele. The firm's strategically located global land bank has the potential to support the lucrative development of approximately $26 billion of new industrial projects in upcoming years.

No-moat-rated Prologis closed the Duke Realty acquisition and ended the year with a good set of numbers. The consolidated entity reported funds from operations, or FFO, of $1.24 per share, slightly beating the FactSet consensus estimate of $1.22 per share. The industrial space continues to be strong, but we are seeing increasing signs of growth moderation primarily due to a weaker macroeconomic environment. As we have highlighted earlier, slower adoption of e-commerce and a strong supply pipeline should result in the normalization of vacancies and market rent growth from the currently elevated levels. Having said this, the current mark-to-market of 67% on the current leases of the company ensures robust NOI growth for many years. The net effective re-leasing spread was reported at 50.6% for the fourth quarter, down from 59.7% in the previous quarter. We are maintaining our $118 per share fair value estimate after incorporating the fourth-quarter results.

No-moat-rated Prologis reported decent third-quarter results with the firm reporting funds from operations, or FFO, of $1.73 per share, beating the FactSet consensus estimate of $1.66 per share. The company continues to benefit from the historically low vacancy rate environment in industrial real estate. The market for industrial real estate continues to be strong, but we are seeing some signs of moderation. We believe that weaker macroeconomic conditions, slower adoption of e-commerce, and a strong supply pipeline will result in the normalization of occupancy levels and market rent growth from the currently elevated levels in the upcoming years. We are reducing our fair value estimate for Prologis to $118 per share from $128 after moderating our medium-term rent growth, assets under management growth, and development-related value creation expectations.

Prologis acquires, develops, owns, and operates industrial facilities that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry, typically near large labor pools and extensive transportation infrastructure. The firm's strategy is to leverage the organizational scale of its 1 billion square foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele. The firm's strategically located global land bank has the potential to support the lucrative development of approximately $26 billion of new industrial projects in upcoming years.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

We are relaunching the coverage of Prologis after taking a fresh look at the firm. We assign a no-moat rating, a stable moat trend, and a standard capital allocation rating to the company. We are decreasing our per share fair value estimate for Prologis to $128 from $143.

Prologis acquires, develops, owns, and operates industrial facilities that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry, typically near large labor pools and extensive transportation infrastructure. The firm's strategy is to leverage the organizational scale of its 1 billion square foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele. The firm's strategically located global land bank has the potential to support the lucrative development of approximately $26 billion of new industrial projects in upcoming years.

No-moat-rated Prologis reported strong second-quarter results as its funds from operations, or FFO, of $1.11 per share was 9.9% higher than the $1.01 in FFO during the second quarter of 2021. The company continues to benefit from buoyant demand for industrial space with second-quarter results largely in line with our expectations. Management has slightly increased its full-year core FFO guidance by 60 basis points and same store NOI guidance by around 90 basis points. After incorporating the company's second-quarter results, we are maintaining our $143 per share fair value estimate for Prologis.

After increasing its offer from what it had proposed a month ago, no-moat Prologis announced that it has reached an agreement to acquire no-moat Duke Realty in a deal estimated to be worth $25.6 billion (which includes the assumption of $3.8 billion in debt). Prologis increased its all-equity offer to 0.475 of its own shares for each share of Duke Realty held, up from the 0.466 exchange rate announced in its May 2022 offer. Based on Prologis' closing share price of $117.24 on June 10, that values Duke at $55.69 per share, which is roughly in line with our $53 per share fair value estimate. Given that the value of the deal is still dependent on movements in Prologis' stock price (which fell 7% June 13 on news of the increased offer), we do not currently anticipate changing our fair value estimate for Duke Realty.

No-moat Prologis announced that it has offered to acquire no-moat Duke Realty in a $23.7 billion all-stock transaction. Prologis is offering 0.466 shares of its common stock per share of Duke’s common stock, which values Duke Realty at $61.68 per share, a 29% premium compared with Duke’s closing price on May 9. However, Prologis also revealed in the press release that it has tried engaging with Duke’s management over the past five months, having offered an exchange ratio of 0.465 that represented a 20% premium over Duke’s closing price on Nov. 29, 2021. While we view the current offer to be a positive for Duke Realty shareholders given it is a 16% premium to our $53 fair value estimate, we don’t believe that the deal is likely to be accepted either by Duke’s management team or by Duke’s shareholders. Therefore, we do not plan to change either our $143 fair value estimate for Prologis or our $53 fair value estimate for Duke Realty.