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The COVID-19 outbreak has had a significant impact on the real estate investment trust (REIT) sector this year. Investors bailed on most REIT stocks this spring due to concerns that it would impact their tenants' ability to pay rent. Even top industrial REIT Prologis (NYSE: PLD) has felt some effect as shares plummeted more than 25% at one point.
However, due to the strong market rally over the past few weeks, Prologis has made back all those losses and then some. That rebound likely has investors wondering if shares are still a compelling buy. Here's a look at the case for and against buying Prologis these days.
The case for buying Prologis
Prologis is one of the leaders in logistics real estate. The company currently owns more than 4,600 properties leased to 5,500 tenants. That puts it at the forefront of supporting the rapidly expanding e-commerce industry as its facilities serve as key distribution hubs. The company's leading market position makes it a go-to source for companies that need to increase their capacity.
However, what really sets Prologis apart from other logistics REITs is its ability to grow shareholder value as it makes investments to expand its portfolio. For example, the company has increased its core funds from operations (FFO) per share by a 12% compound annual rate over the last five years, which has supported a 10% compound annual growth rate (CAGR) for its dividend.
Meanwhile, other logistics REITs delivered a 6% CAGR in both core FFO and their dividends. That historical outperformance bodes well for its ability to continue creating value for shareholders in the future.
Another factor in favor of Prologis is its top-tier balance sheet. The REIT has A-rated credit, low leverage, and lots of liquidity. On top of that, it has a conservative dividend payout ratio of 65% of its projected 2020 FFO. Because of that, it has ample financial capacity to continue expanding its portfolio, which should drive FFO and dividend growth.
The case against buying Prologis
One concern with Prologis is the impact the COVID-19 outbreak will have on its operations and growth potential. On a positive note, the company has been able to collect most of the rent its tenants owe. It received 97.6% of April's rent and 95% of what it billed in May. However, given the uncertainty in market conditions, the company reduced its full-year FFO forecast from $3.67 to $3.75 per share to $3.55 to $3.65 per share.
Further, the company trimmed its overall growth expectations. It currently only expects to start between $500 million to $800 million of development projects, down from its initial view of $2 billion to $2.4 billion. It also reduced its outlook for acquisitions, asset sales, and development gains. This reduction in investment activity could impact its growth in the near-term.
Despite the lowered outlook and potentially stunted near-term growth, investors still value Prologis stock at a premium. Shares currently trade at more than 25 times its 2020 FFO forecast, which is well above some of its cheaper industrial-focused peers.
A premium company with a price to match
Prologis won't appeal to all REIT investors. Because of its higher valuation, it’s not a value stock. Meanwhile, that premium value, when combined with a low dividend payout ratio, has it only yielding about 2.5%, which means it probably won't entice dividend investors.
However, Prologis should appeal to investors seeking the potential of outsized growth and total returns. The company has a history of increasing both its FFO and dividend at an above-average rate. While there might be some near-term headwinds from COVID-19, Prologis could also end up coming out ahead if it uses its strong balance sheet to make opportunistic acquisitions. That upside potential makes it a compelling buy for growth-focused investors.
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