Why Prologis Is A Top Pick For 2023 (NYSE:PLD)

As the global leader in logistics real estate, with a focus on high-barrier and high-growth markets, Prologis (NYSE:PLD) is very well positioned to benefit from the continued growth in e-commerce and online shopping. While 2022 was a complicated year for the company which came with several headwinds, we believe Prologis is very well positioned to do well in the coming year. Admittedly, some of the headwinds Prologis experienced this year were self-inflicted, such as paying top-dollar for the Duke Realty acquisition. We don’t think Prologis overpaid that much, and with the synergies it probably had a neutral effect. Still, we believe some investors were disappointed in the acquisition and that created a negative sentiment on the shares. There were also some headwinds out of Prologis’ control, such as the rising rates environment and some deceleration in e-commerce growth as the economy reopened. Most important of all in our opinion, shares had gotten a little ahead of the fundamentals, and some level of correction was necessary to realign the share price with the fundamentals.

There are several reasons why we are bullish on Prologis for 2023. The main reason is that the starting valuation is a lot more attractive. We now view shares as somewhat undervalued, but with a lot of growth tailwinds that should help earnings continue to grow. We also believe that logistics real estate in general will perform well, given that we should be getting close to the end of the interest rate hiking cycle, and that the fundamentals for logistics space remains very supportive. The rise of e-commerce and the shift towards online shopping has led to increased demand for logistics real estate, as companies need more space to store and distribute their products. Prologis is well-positioned to benefit from this trend, given its significant presence in key markets around the world. Prologis also has a proven development track record, having generated extraordinary risk-adjusted returns. It is well positioned to continue creating value with its significant, development-ready land portfolio. Finally, as leases continue to roll to market, the portfolio should see high single-digits net effective same store NOI for several years, even with stagnant market rent growth.

Competitive Moat

We believe Prologis has a narrow competitive business moat, mostly as a result of its exceptionally low-cost operating structure. Early investments in technology infrastructure and synergies from strategic acquisitions have reduced G&A as a percentage of gross book value AUM from ~85bps in 2011 to ~38bps currently. The company has become a lot more efficient despite investments in innovation and new lines of business. Prologis is a lot more efficient than most of its peers and blue-chip real estate companies.

Growth

Prologis has used its competitive advantages to turbo-charge growth and gain market share in the already fast-growing logistics sector. As a result, its funds from operation have been growing consistently, as can be seen below, and are now estimated to approach $6 per share by the end of next year.

Some of the secular tailwinds that the company is leveraging include the increase in e-commerce sales penetration, and companies starting to increase their inventories after the supply-chain issues recently experienced by many companies.

These tailwinds are resulting in very strong global rent growth for the types of properties that Prologis owns. In fact, currently market rents are significantly higher than what Prologis is charging, and as some of these leases expire, Prologis should experience same store net operating income growth. As leases continue to roll to market its portfolio should see high single-digits net effective SSNOI for several years. This lease mark-to-market (LMTM) provides visibility into earnings growth and is underappreciated by many investors.

Finally, Prologis has another important source of growth that few other companies have. Prologis manages assets for third parties and earns fee-related earnings. This is a very attractive business that further contributes to earnings growth at the company.

Strong balance sheet

Prologis has enormous investment capacity to continue fueling its growth, with an estimated $13B of investment capacity across PLD and its open-ended ventures. Thanks to its A3/A rated balance sheet by Moody’s/S&P, it has a very low cost of debt. Its weighted average interest rate is only 1.9%, with a weighted average term of 9.6 years. Floating rate debt is less than 15% of its total debt, and the company makes significant use of Green Bond Issuances, with 19 issuances to date.

Valuation

After a period of over-valuation, we believe shares are currently close to fair value. This reasonable starting valuation, together with the dissipation of some headwinds positions the shares to potentially offer attractive returns in 2023. We believe that without needing much in terms of multiple expansion, the company could easily provide investors a return in the 10-15% range.

We estimate a net present value of the earnings stream of ~$114, which is very close to where shares are currently trading, leading us to believe that shares are priced to deliver long-term investors returns around 10%. For a blue-chip, high-quality company like Prologis, we believe this to be a very attractive potential return.

	FFO	Discounted @ 10%
FY 22E	5.12	4.65
FY 23E	5.58	4.61
FY 24E	5.68	4.27
FY 25E	6.36	4.35
FY 26E	7.12	4.42
FY 27E	7.98	4.50
FY 28E	8.94	4.59
FY 29E	10.01	4.67
FY 30E	11.21	4.75
FY 31E	12.56	4.84
FY 32 E	14.06	4.93
Terminal Value @ 3% terminal growth	200.91	64.02
NPV		$114.60

Click to enlarge

Risks

Like many real estate companies, Prologis is sensitive to economic downturns, as a slowing economy can lead to decreased demand for industrial properties and lower rental rates. Prologis faces competition from other real estate developers and investors in the industrial and logistics real estate space. The company also operates in multiple countries around the world, and is exposed to geopolitical risks such as political instability, changes in government regulations, etc.

Conclusion

Prologis had a tough 2022 as it digested its Duke Realty acquisition for which it paid top-dollar, and it faced a number of other headwinds. These included rising rates, a high starting valuation, and e-commerce deceleration as the economy reopened post-pandemic. With many of these headwinds dissipating or moderating next year, and with a much more reasonable starting valuation, we believe Prologis shares are a top pick for 2023. Especially when considering the high-quality, blue-chip nature of the company.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.