Prologis (NYSE: PLD) is a behemoth among real estate investment trusts (REITs). It currently clocks in as the second-largest REIT by market cap, at nearly $70 billion. While its large scale gives it some advantages, it doesn't have its smaller rivals' growth potential.
Because of that, investors who are thinking about buying Prologis might want to consider Duke Realty (NYSE: DRE) instead. The fellow industrial REIT's smaller scale -- its market cap is around $14 billion -- is one of the many reasons it looks like a better opportunity right now than industry giant Prologis.
The same elite financial foundation
There's no doubt, Prologis is an elite REIT. It's one of only eight with A-rated credit. However, Duke Realty's credit quality rivals that of Prologis. While Duke doesn't have A-rated credit (it's one notch below), its credit metrics are at "A" quality levels. For example, its net debt-to-EBITDA is 4.7 times, which is even better than Prologis' 5.1 times level.
Meanwhile, Duke Realty boasts a similarly conservative dividend payout ratio. Prologis was on track to generate enough cash last year to cover its 2.5%-yielding dividend by 1.6 times. Meanwhile, Duke can cover its 2.7%-yielding dividend -- which it recently increased by 8.5% -- by about 1.5 times. Because of those factors, Duke Realty has just as much financial flexibility as Prologis.
Even better growth prospects
Duke Realty complements its top-notch financial profile with one of the strongest development pipelines in the industrial sector. The company started more than $775 million of development projects last year, thanks to strong demand for logistics warehouse space in the U.S. due to accelerating e-commerce growth. As a result, Duke's development pipeline accounts for 9% of its total assets. That's by far the biggest in its peer group and more than double Prologis' current pipeline, which is 4% of its current assets. Meanwhile, Duke's development pipeline is much less risky than those of rivals, which have bet heavily on speculative development. Duke has already pre-leased 65% of its pipeline, putting it well ahead of Prologis (43%) and other rivals.
Meanwhile, Duke should have plenty of additional expansion opportunities in the future given the projected demand for industrial space. According to estimates by JLL (NYSE: JLL), the U.S. needs to develop more than 1 billion square feet of additional warehouse space by 2025 to support the fast-growing e-commerce sector. To put that size into perspective, Duke Realty currently owns 159 million square feet of warehouse space, suggesting lots of expansion potential.
All this at a relatively lower valuation
Usually, financially strong companies with visible growth prospects trade at premium values. On one hand, that's true of Duke Realty as it sells for 26 times its AFFO and 23 times FFO, whereas most other REITs trade at a mid-teens multiple of those metrics.
However, compared to Prologis -- and most other warehouse-focused industrial REITs -- Duke Realty is relatively cheaper. For comparison, Prologis currently fetches 30 times its AFFO and 25 times its FFO. Meanwhile, Duke Realty only trades at a 2% premium to its net asset value (NAV), while Prologis sells for a 16% premium to its NAV.
A better all-around buy right now
Prologis is well-positioned to benefit from the increasing demand for warehouse space. Thus, it should be able to keep creating value for investors.
However, Duke Realty is in an even stronger position for that future. It boasts having a better current pipeline and a balance sheet on par with Prologis to capture new opportunities. Add in its lower relative valuation, and it could generate higher total returns than Prologis. That's why investors considering Prologis should at least take a closer look at Duke Realty.