REIT Watch: ProLogis is Undervalued

Bear markets mean opportunities for savvy investors, and doing your homework can help you add valuable stocks at bargain prices as the clock ticks towards 2009. To state the obvious, investors looking to build a strong portfolio should find stocks that pay healthy dividends while trading at or below their book values. This is true in good economic times and bad - but what’s surprising is how many stocks today actually fit this description, given the drastic drop in the overall market over the past couple months.

One example is ProLogis (PLD), a REIT that owns and manages interests in more than 2,500 distribution facilities, offices, and industrial properties. Any company associated with real estate should be red flagged in the current economic crisis - and the industrial market is no exception, since when companies go bankrupt or downsize, their need for facilities abates. But volatility in demand for industrial real estate doesn’t approach the issues faced by PLD’s commercial or residential REIT cousins. Commercial REITs are directly affected by the downturn in consumer spending, which has created vacancies in malls and shopping centers, while residential REITs are suffering from the ongoing depression in the housing market.

In contrast, the industrial real estate market is pretty steady - and while PLD’s short term prospects aren’t rosy, it should make it through the downturn intact. Investors willing to take this risk will find themselves rewarded by a high yield, undervalued stock. Some reasons why:

• PLD’s $2.07 2008 dividend translates to a 28% yield percentage. The company did announce in November that it will target a $1.00 dividend per common share for 2009, a cut from a previous forecast of $2.28 in response to the dreary economic climate. But that’s still better than a 10% yield using the stock’s current pricing.
• PLD is currently trading at a 0.29 price-to-book ratio - which means its share price is less than 30% of its book value (current assets minus current liabilities). First, let’s put that number in context - it’s common for REITs to have a price-to-book ratio under 1 due to their significant real estate assets and frequent use of debt to finance expansion. But it is useful to compare PLD’s 0.29 to others in its industry - and its closest competitor, AMB Property Corp.(AMB) checks in at a much less appealing 0.89.
• The company’s current ratio of 2.712 indicates it shouldn’t have a problem making any of the debt payments coming due in the next year. This is important for two reasons - first, refinancing debt is extremely difficult given the huge pressure on the credit markets, and second because PLD, like all REITs, must continually expand its real estate holdings to grow its revenues. In recent months, PLD has expanded into the UK, Romania, Japan, and Mexico, in addition to U.S. markets like Reno and Chicago.

Comments

[Joyful Alte...:]

All the new and newer warehouses around here are Pro Logis, so I guess how you'd feel about the company would depend on how full you expect them to be.

2008 Dec 19 08:15 AM

[{5U}:]

Once again, another silly article.

Have you checked where the bonds are?

They are in THE LOW 30S. THAT'S RIGHT. 32-34 CENTS ON THE DOLLAR. THE YIELDS ARE BETWEEN 30 AND 40% AND ARE PUTTABLE.

Doesn't that tell anybody here what that means? Or are credit investors stupid and the equity smarter when it comes to credit?

2008 Dec 19 08:17 AM

[axelrod608:]

5 REIT's have payouts in the next 6 months that they do not have the cash to redeem. Probability of refinancing is around zero. Commercial RE is one of the next shoes to drop. In this market, due diligence is trump.

2008 Dec 19 10:27 AM

[kotika98:]

they are toast

2008 Dec 19 10:48 AM

[BerkeleyBob:]

I bailed on my position in PLD earlier this month at $7.31; had held for several years. Share price trended down from over $40 but held steady for much of the calendar year, third quarter conference call did not indicate any reason for the massive drop. Forced sales due to mutual fund and hedge fund redemptions? Maybe. Although heavily held by institutional investors, this appears to be a well managed low profile outfit. Before re-investing at the present low (and by most measures, attractive) levels, I would want to know more about the market valuation of its debt...

2008 Dec 19 12:31 PM

[{5U}:]

Who wrote this P.O.S. article?

Sounds like a plug from some fund manager chasing performance.

2008 Dec 19 12:59 PM

[User 1788:]

Their debt to asset is 0.54 about average for the REIT industry.
Can you enlighten(I mean it) me what PLD should have more risk than other REIT such as AMB? AMB's PS is 2.7 vs PLD is 0.42.

Sam


On Dec 19 10:27 AM axelrod608 wrote:

> 5 REIT's have payouts in the next 6 months that they do not have
> the cash to redeem. Probability of refinancing is around zero.
> Commercial RE is one of the next shoes to drop. In this market,
> due diligence is trump.

2008 Dec 21 06:36 PM

[Richard Woon:]

What do you make of the price-to-book ratio when the books can't be trusted?

Jan 27 01:43 AM

[James Higgi...:]

This stock is going to $0, look at the debt.

Jan 30 10:24 AM