The coronavirus pandemic has rocked most real estate investment trusts (REITs), but one sector that seems immune to the devastating effects of the pandemic is industrial real estate. Prologis (NYSE: PLD), one of the largest industrial REITs with global presence, may make investors wonder if the REIT is still a buy today. Here's a closer look at the company and the case for and against buying Prologis these days.
The case for buying Prologis
Prologis is the largest industrial publicly traded REIT, with interest or ownership in 4,703 logistics and warehouse buildings, for a total of 984 million square feet in 19 countries. An estimated $2.2 trillion of economic goods flow through one of Prologis' distribution centers each year and accounts for 2.5% of global GDP. This massive global presence has helped Prologis capitalize on the high demand for logistics space as well as the rapidly expanding e-commerce market.
The company's core funds from operations (FFO) grew 15% from 2019 to 2020, with a 28% net effective rent change in fourth quarter 2020 alone. Earnings also rose, despite net earnings per share for the year being less than 2019, attributed to the early extinguishment of $188.2 million in debt. This helped bring the company's debt-to-adjusted EBITDA to 4.51 times, while maintaining almost $5 billion in liquidity and a top-notch rating of A3/A- by Moody's (NYSE: MCO) and Standard & Poor's.
The case against buying Prologis
Initial concern at the onset of the global pandemic resulted in Prologis reducing its 2020 forecast. However, the company managed to surpass its forecast despite COVID-19-related challenges in the marketplace. The company now predicts continued growth in 2021, with a forecasted core FFO of $3.88 to $3.98 and net earnings of between $2.36 to $2.52.
Prologis is planning $1.9 billion to $2.1 billion in development stabilizations, and I think for good reason. Demand, rents, and revenues are up across the board for industrial space, particularly logistics and distribution warehouses, Prologis' specialty. Its top-quality tenant profile, strong financial standing, and large market reach mean continued growth over the next year and beyond is likely.
The biggest and only of the only cases against buying Prologis right now is simply its share price as it relates to value and return. Share prices currently rival pre-pandemic highs, with February 2021 seeing shares skyrocket to $107 per share, meaning investors can expect a return around 2.3%. Share prices will likely grow, especially if the company can maintain or continue to surpass its annual predictions, but I don't see a huge value opportunity here.
The Millionacres bottom line
Determining if it's a buy today really is a personal choice. Prologis is a super strong company with room to grow, but its lack of value in the marketplace today makes other REITs a more compelling buy.