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Better Buy: Prologis vs. Duke Realty Corporation

Nov 14, 2020 by Matthew DiLallo
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Industrial REITs (real estate investment trusts) have performed well this year. As a group, they’ve produced a nearly 9% total return year to date, vastly outperforming the double-digit negative total return of the average REIT, according to Nareit. Meanwhile, the two leading industrial REITs -- Duke Realty (NYSE: DRE) and Prologis (NYSE: PLD) -- have performed even better, as both are up more than 13% on the year.

Here's a look at which of these two industry leaders looks like the better buy right now.

Comparing balance sheets

One important thing investors should do when comparing two similar REITs is examine their financial profiles. Here's how these two leading industrial REITs stack up against each other:

REIT Dividend Yield Dividend Payout Ratio Credit Rating Debt-to-Adjusted EBITDA
Prologis 2.3% 63% A-/A3 4.3 times
Duke Realty 2.5% 67% Baa1/BBB+ 4.9 times

Data source: Prologis and Duke Realty.

As that table shows, Prologis and Duke Realty have remarkably similar financials. Prologis is slightly ahead, as it has lower leverage and dividend payout ratios. It also has a higher credit rating; it's one of only a handful of REITs with A-rated credit. However, Duke recently increased its dividend by 8.5%, which nudged up its payout ratio. Meanwhile, the company's credit metrics are at "A" quality levels. Thus, both REITs have top-notch financial profiles.

A look at their portfolios and growth prospects

While the REITs have similarly strong financials, Prologis has a bigger portfolio by far. It currently owns or manages 976 million square feet of space in 19 countries leased to about 5,500 tenants, primarily in the business-to-business and retail/online fulfillment categories. Meanwhile, Duke Realty owns 159 million square feet of industrial space in 20 major U.S. logistics markets.

One reason Prologis has a larger portfolio is that the company manages several co-investment ventures, including private real estate investment funds and publicly traded REITs listed in and focused on other countries. These funds generate fee income for Prologis while expanding its reach across the globe. They also give it greater access to capital, which allows it to make more acquisitions. For example, two funds it manages spent $4 billion to take Industrial Property Trust private earlier this year, adding 236 properties with 37.5 million square feet to Prologis' managed portfolio.

In addition to acquisitions, another major growth driver for Prologis is development projects. The company expects to start $1.6 billion to $2 billion of development projects this year while benefiting from the anticipated stabilization of $2.3 billion to $2.5 billion of completed projects. Meanwhile, it should have no problem starting additional development projects in the future, given the view that the U.S. might need an additional 1 billion square feet of warehouse space by 2025 to meet projected demand.

Development is also a big part of Duke Realty's growth strategy. The company currently has $846 million of projects in its pipeline, with 65% preleased to future tenants. To put that size into perspective, it's about 8% of its assets, almost double the size of Prologis' development pipeline as a percentage of its assets. That backlog of projects leads Duke to believe it can grow its earnings and dividend at a mid-to-high single-digit rate in the near term. That would put it up close to Prologis' level, which has delivered peer-leading growth in recent years thanks in part to the extra benefit it gets from managing investment funds.

Adding up the valuation

One final factor investors should consider when sizing up two similar investment opportunities is their valuations. Here's how these two industrial REITs stack up against each other:

REIT Recent Price 2020 FFO (estimate) P/FFO
Prologis $102.02 $3.77 27 times
Duke Realty $40.33 $1.52 26.5 times

Data source: Prologis and Duke Realty.

As that table shows, Prologis is only slightly more expensive at the moment. It's easy to justify that premium price given its larger size, marginally stronger balance sheet, and similar growth prospects.

This one could go either way

There isn't much separating Duke from Prologis these days. However, what does differentiate these two is Prologis' larger scale and global reach. Because of that, it gives investors broader exposure to the fast-growing demand for logistics real estate around the world, making it stand out as a more compelling buy right now.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.