Prologis Stock Q4: A High-Quality REIT That’s Still An Attractive Buy (NYSE:PLD)

Introduction

With the recent retraction in the REIT sector (VNQ) in the last month, many are now trading at fair valuations again after the optimism of rate cuts have seemed to fizzle a bit. This prompted me to do an analysis on one of the highest-quality REITs, Prologis (NYSE:PLD). Higher-quality businesses like PLD usually come at a premium but sometimes you can catch them at a decent valuation.

As my readers may know, I’m a buy-and-hold investor with a minimum 5-year outlook for my holdings. However, if the fundamentals change for the worse then that may prompt me to sell. But usually, I plan to hold for the long-term. One REIT I think is a great long-term buy is Prologis and in this article I discuss why the recent share price volatility may present a buying opportunity.

Previous Thesis

I last covered Prologis this past December in an article you can read here. I gave four reasons why the stock was a buy for 2024 and beyond. One of the main reasons was the expected rate cuts this year. I also talked about the REIT’s well-covered dividend and strong balance sheet which makes them one of the highest-quality REITs in the sector. Since my last article PLD’s share price is down roughly 5%, and now may present a decent buying opportunity for long-term investors.

REITs Are More Than Income Plays

Until a few years ago, REITs weren’t considered attractive investments for capital appreciation, but only as income plays. Some investors still look at them this way and I disagree. I think over the years that has changed and will likely continue to benefit the sector.

As a Navy veteran, I would often hear service members talk about buying real estate and renting it out for appreciation and income. And while real estate can be very lucrative, no one ever talks about the negatives of ownership.

It also takes a sizable portfolio of properties to see sizable returns, but this often takes a lot of your time. No one ever talks about the time it takes to manage a property or the tenant who decides to squat for months or years at a time without paying rent.

They also never talk about the roof that needs to be replaced which can cost them $10,000 or more to fix. There are also a lot of fees associated with owning real estate such as property taxes, property upkeep, the initial down payment, and closing costs. Fellow analyst, Jussi Askola, recently discussed why a house is a terrible investment and I have to say I agree to a certain extent.

As a military retiree whose only real estate ownership is through REITs, I’m planning to live the RV life in the coming months. REITs, normally known for their dividends, also offer investors growth, whether it be dividend growth or capital appreciation without all the headaches of owning traditional real estate. In the chart below you can see Prologis’ share price is up nearly 100% over the past 5 years, outperforming the S&P’s near 84% in the process.

Here you can see Prologis outperforming some of the most popular and well-known stocks like Starbucks (SBUX) and Amazon (AMZN) over a long period of time as well. They lose to other companies like Tesla (TSLA) and Microsoft (MSFT) but the point I’m trying to make is REITs are more than just collecting dividends. That’s why picking quality ones are important and chasing yields is something that will likely burn you over the long run.

Poised For Further Growth

As a REIT investor though, the most important metric for me is how well the stock is covering its dividend. And one way to continue covering this comfortably is by growing the business which eventually grows earnings over time.

Their Q4 earnings further strengthened why I think PLD is a buy for 2024 & beyond. FFO of $1.29 was in-line and the company also posted a small revenue beat by $80 million. They also continued expanding; adding an additional 54 properties to bring their total to 5,613 buildings, up from 5,559 since Q3. During the year, PLD deployed $7 billion in new investments and delivered double-digit earnings growth at 11%.

FFO also came in at the top end of their guidance at $5.10 while occupancy also crept up to 97.6% from 97.2% in the prior quarter. For being a REIT, Prologis has a very conservative AFFO payout ratio at just 70%. Their core FFO payout ratio is even more conservative at just 62% for the full-year which means the company has ample liquidity to reinvest back into the business.

This means the REIT also has room to continue to grow the dividend as well. Using Seeking Alpha’s annual dividend estimate of $3.74, they expect a $0.065 increase this coming March to $0.935 a quarter. I expect a dividend increase between $0.05 to $0.07 a share. This, along with their strong Q4 earnings shows why PLD is a REIT to own for the long-term.

Their projected earnings for the end of this year are also expected to post some strong single to double-digit FFO growth in a range of 8% to 10.5% according to management. FFO is expected to be in a range of $5.50 to $5.64. Looking out further, PLD’s FFO growth is expected to be double-digits for the next 3 years which is great to see from a REIT as most are considered income vehicles that offer low single-digit growth.

Balance Sheet Remains Strong

Despite the $7 billion deployed to continue growing their portfolio, Prologis has maintained a strong net-debt-to EBITDA ratio of 4.6x and fixed-charge coverage ratio of 7.9x showing the strength of their balance sheet. Their net-debt-to EBIDTA ratio crept up from 4.3x in Q3 but still remains healthy. Their FCCR is even healthier at 7.9x meaning the REIT has no problem covering their debt, interest expenses, etc.

Furthermore, they only have roughly $428 million due this year and $700 million in 2025. Both had a weighted-average interest rate of 2.2% and 5.5% respectively. Both do, however, have some exposure to floating rates due to only 61% of this year’s debt being fixed-rate and 25% for next year. But with their A-rated balance sheet and interest rates expected to be significantly lower by then, this shouldn’t be a significant headwind for the industrial juggernaut.

A Decent Buy At The Current Price

High-quality companies like Prologis usually command a premium so even with a share price decline in the last month, the stock still trades at roughly 25x P/FFO at the time of writing. A great time to buy PLD was back in October when they dipped below $100, but investors should know quality usually doesn’t stay down for long.

Using the Dividend Discount Model and an expected growth rate of 8.0% for PLD, this gives me a price target of nearly $150 for Prologis, nearly $10 higher than the average price target of roughly $141.

But seeing how many expect rates to decline sometime this year and the quality of PLD, I wouldn’t be surprised if PLD’s price surpassed this sometime this year. Using the midpoint of management’s core FFO guidance range of $5.57 for the fiscal year and the price target of roughly $150, this would give them a P/FFO ratio of nearly 27x. This is not out of the norm for REITs of Prologis’ stature.

Risk Factors

Management stated they do suspect occupancy to drop in the first quarter. If so, this could suppress the company’s financials going forward. Higher vacancy rates in the coming months will likely also weigh on the share price, especially if these decline quarter-over-quarter.

A recession would also cause a further decline in vacancies as well if one comes to fruition. Although there have been talks of a recession for quite a while, we’ve managed to dodge one for now, but the economy could still see one in the foreseeable future.

There’s also the risk of interest rates not declining like many suspect this year. This is one reason REIT prices have declined over the past week or so in my opinion. Additionally, overall negative market sentiment surrounding whether rates will decline this year could cause further volatility in the coming weeks/months.

Bottom Line

For investors seeking long-term growth and income, Prologis is the perfect choice. With a low payout ratio, the REIT is also poised for strong dividend growth for those willing to hold the stock for the long-term. Furthermore, PLD has outperformed many popular, well-known stocks showing REITs are more than just income plays, awarding investors some capital appreciation over the long-term as well.

With the market likely pricing in uncertainty of rate cuts this year, this has caused a sell-off in the sector, and now many are trading at attractive valuations. When rates do decline, which I suspect they will this year, Prologis’ share price will most likely see some nice upside. For those trying to grow their income stream from high-quality real estate stocks, PLD is a perfect choice and currently remains a buy.