REIT Focus: ProLogis, Inc.

| About: Prologis (PLD)

Summary

PLD is an industrial REIT engaged in the ownership, acquisition, management and development of logistics properties in the worlds primary population centers.

PLD owns directly and through joint ventures 3,380 industrial properties containing 667 million sq. ft. with 5,200 tenants. Occupancy as of Q1-16 was 95.4% and the yoy NOI increased 6%.

PLD is an excellently managed REIT, with a diversified portfolio, an investment grade credit rating, attractive dividend of 3.61% and low leverage at 32% of enterprise value.

We like the stock of PLD and have a buy recommendation at a price below $45/sh.

This REIT Focus is on Prologis, Inc. (NYSE:PLD), a publicly traded REIT that is engaged in the ownership, acquisition, development, management of logistics properties in the worlds primary population centers. PLD has two business segments, Real Estate Operations (ownership of industrial assets) and Strategic Capital (management of co-investment ventures).

Property Information

As of Q1-16, PLD owned directly and through co-investments and joint ventures, 3,380 industrial and logistics properties containing 667 million sq. ft. and with 5,200 tenants. PLD's properties are located in the U.S. (71% of NOI), Europe (19% of NOI), Other Americas (6% of NOI) and Asia (4% of NOI). As of Q1-16, portfolio occupancy was 95.4%, lease renewal rents increased 16.2% and the same store yoy net operating income growth was 6%.

Major Events

As of Q1-16, PLD has equity investment commitments to co-investment ventures of $303 million.

As of Q1-16, PLD generated $678 million in net proceeds from disposition gains and property contributions, primarily in Japan.

During 4/16, PLD redeemed a portion of its investment in Prologis Targeted European and U.S. Logistics Funds for a total of $411 million.

During 4/16, PLD increased its global senior credit facility to $3.4 billion.

Corporate Data

PLD is traded on the NYSE, is incorporated in Maryland and is located in San Francisco, CA. PLD's debt is rated Baa1 by Moody's and BBB+ by Standard and Poor's. PLD has a market capitalization of approximately $25 billion. PLD owns a 97.04% general partner interest in its UpReit partnership, Prologis, L.P.

Management

Hamid R. Moghadam, 56, Chairman and CEO

Mr. Moghadam is chairman of the board of directors and chief executive officer of PLD. Mr. Moghadam co-founded the company's predecessor, AMB Property Corporation, in 1983 and led the company through its initial public offering in 1997 as well as its merger with PLD in 2011. He has been a board member since AMB's IPO in 1997 and serves on the board's executive committee. Previously, Mr. Moghadam served as trustee and member of the board's executive committee for the Urban Land Institute, as well as chairman of the National Association of Real Estate Investment Trusts (NAREIT) and the Real Estate Investment Trust Political Action Committee. Mr. Moghadam received the 2013 Ernst & Young National Entrepreneur of the Year Overall Award and is a recipient of the Ellis Island Medal of Honor. Mr. Moghadam has been named CEO of the Year on eight separate occasions by four industry publications and has received numerous lifetime achievement awards from industry organizations, including NAREIT and NAIOP. Mr. Moghadam received an MBA from the Stanford Graduate School of Business and a Bachelor and Master of Science in engineering from the Massachusetts Institute of Technology.

Michael S. Curless, 52, Chief Investment Officer

Mr. Curless is chief investment officer, chairs the investment committee and oversees the global customer solutions and valuations teams. Mr. Curless is also responsible for the deployment of capital and oversees the acquisition and disposition teams. Mr. Curless has been part of PLD at two points in his career. From 2000 to 2010, prior to rejoining PLD, Mr. Curless was the president and one of four principals at Lauth, a privately held, national construction and development firm. Lauth has developed in excess of $3 billion of office, industrial, retail and healthcare projects across the United States. In this role he had overall responsibility for operations, development and asset management for the firm. From 1995 to 2000, prior to joining Lauth, Mr. Curless was a first vice president at PLD, overseeing the Indianapolis and St. Louis market operations and management of key national accounts. Mr. Curless has also been a marketing director for Trammell Crow Company and a financial analyst with General Electric Company. Mr. Curless has an MBA in marketing and finance and a Bachelor of Science in finance from Indiana University.

Thomas S. Olinger, 49, CFO

Mr. Olinger is chief financial officer, responsible for worldwide corporate finance including treasury, cash management, financial planning, financial reporting, accounting, tax, investor relations and internal audit. Prior to assuming this role, Mr. Olinger served as Prologis' chief integration officer, overseeing information technology and the implementation of best-practice processes and procedures related to the merger of AMB Property Corporation and PLD. From 2007 to 2011, Mr. Olinger served as AMB's chief financial officer. Prior to joining AMB in 2007, he served as vice president, corporate controller at Oracle Corporation, where he was responsible for global accounting, external reporting, technical accounting, global revenue recognition, Sarbanes-Oxley compliance and finance merger and acquisition integration. Prior to this, Mr. Olinger spent 14 years at Arthur Andersen, the last three as an audit partner in its U.S. real estate and technology groups. Mr. Olinger received a Bachelor of Science in finance, with distinction, from Indiana University.

Ownership

Top Institutional Holders:

Shares

%

Vanguard Specialized REIT Index Fund

38,137,764

7.26

State Street Corporation

29,649,174

5.65

JP Morgan Chase & Company

20,445,442

3.89

Blackrock Institutional Trust Company, NA

20,258,896

3.86

Invesco, Ltd.

19,522,728

3.72

Click to enlarge

Ownership Breakdown

% of Shares Held by All Insider and 5% Owners

1

% of Shares Held by Institutional & Mutual Fund Owners

98

Number of Institutions Holding Shares

502

Click to enlarge

All amounts above per Yahoo Finance

Financial Analysis and Valuation

Select financial data for PLD as of the Q1-16 10Q and supplemental information

(in millions where applicable):

Click to enlarge

Financial Data

Amounts

Real Estate Assets, Gross

$27,628

Total Assets

$31,375

Property Debt (at a weighted average interest rate of approximately 3.2%)

$11,687

Common Stockholders' Equity

$14,632

Revenue

$606

Net Income

$208

Net Income Per Share

$.40

Cash Flow from Operations

$266

Global Senior Credit Facility ($2,749 billion with $333 million used)

$2,416

Market Capitalization

$25,000

Property Debt to:

Gross Real Estate Assets

42%

Market Capitalization

46%

Enterprise Value

32%

Dividend and Yield ($1.68/sh.)

3.61%

Click to enlarge

Valuation Methodology

Q1-16 Revenue

$606

Less: Q1-16 Operating Expenses (excluding depreciation, amortization, interest expense and plus G&A expenses)

225

Q1-16 Net Operating Income

$381

Projected Inflation Rate at 3.5%

x1.035

Projected Q1-16 NOI

$394

Projected Forward Annualized NOI

$1,576

Projected Average Cap Rate

6%

Projected Value of Real Estate Assets

$26,267

Add: Net Operating Working Capital (at book value)

487

Investments in Unconsolidated Entities (at book value)

4,866

Assets for Sale and Notes Receivable (at book value)

468

Land, Property Under Development and Other RE Assets (at book value)

3,013

Total Projected Asset Value of Company

$35,101

Less: Total Debt Per Above

11,687

Series Q Preferred Stock (at liquidation value)

78

Projected Net Asset Value of the Company

$23,336

Common Shares Outstanding-544M Shares (525M common shares plus 19M partnership units and equity awards)

Projected NAV Per Share

$43

Market Price Per Share on 5/13/16

$47

Premium (Discount) to NAV

9%

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Financial Metrics

The gross real estate assets, property debt, revenues, net income, funds from operations, return on invested capital and dividends per share for the years 2011 through Q1-16 are shown in the table below:

(millions except per share amounts) amounts)

2011

2012

2013

2014

2015

Q1-16

Q3 2015 2015

Gross Real Estate Assets

$24,787

$25,809

$20,824

$22,190

$27,521

$27,628

Property Debt

$11,382

$11,790

$9,011

$9,336

$11,626

$11,687

Revenues

$1,533

$1,960

$1,750

$1,760

$2,197

$606

Net Income (Loss)

($188)

($80)

$315

$622

$862

$208

Funds from Operations (FFO)

$412

$66

$552

$855

$888

$1,309

$412

Return on Invested Capital (1)

2.7%

3.9%

3.9%

4.3%

4.8%

NA

Dividends Paid Per Share

$1.12

$1.12

$1.12

$1.32

$1.52

$.42(2)

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(1) This is the ratio of cash provided by operations plus interest expense divided by stockholder's equity plus property debt, less cash and measures the return the REIT is earning on its invested capital.

(2) Dividend is currently $.42 per quarter.

The total return of PLD year to date and through five years is show in the chart below per NAREIT:

PLD Total Return

YTD (4/16)

1-Yr

3-yr

5-Yr

-10.39%

-6.49%

2.95%

4.42%

Click to enlarge

As shown above, our net asset value per share for PLD is $43/sh., compared to a market price of $47/sh. Current average cap rates for industrial properties per our industry

experience and CBRE's Cap Rate Survey are in the 5% to 7% range, depending on the location, quality of the property and credit of the tenant. We have used an average cap rate of 6% due to PLD's portfolio being a well-diversified portfolio of industrial assets.

Valuation Analysis

PLD's strengths, concerns and recommendation are as follows:

Strengths:

· Solid diversified portfolio of industrial properties.

· Investment grade credit rating.

· Low leverage at 32% of enterprise value.

· Attractive dividend yield of 3.61%.

· Well experienced management team.

· YOY net operating income growth of 6%.

Concerns:

· Gross real estate assets have only grown 11% since 2011.

· Low return on invested capital.

Recommendation:

PLD is an excellently managed industrial REIT with a well-diversified portfolio of industrial/logistics properties and our recommendation is as follows:

  • We like PLD due it's excellent management, large and diversified portfolio, attractive yield and international investment exposure. We are recommending the purchase of the stock at $45/sh. or less.

A five-year price chart of PLD is shown below.

Disclosure: I am/we are long VARIOUS REITS IN AN ETF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.