The Long and Short
Playing a little defense with Prologis
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
With volatility ramping up in the debt markets lately but investment grade corporate spreads still near historic tights, it may be a good time to play a little defense. This includes playing defense in REITs, where investors can add exposure to strong names such as Prologis. Through the second quarter of this year, credit fundamentals and operating metrics for the company remain at or near all-time highs, justifying the premium price of its secondary bonds. Longer Prologis notes look like a compelling add for defense or as a barbell credit strategy against riskier credit holdings within REITs. Investors could generate more aggregate carry by positioning Prologis alongside higher-yielding, low-‘BBB’ credits instead of holding a single position in just high-‘BBB’ REIT credit.
Graph 1. PLD compares well to other REITs by rating category
Source: Amherst Pierpont, Bloomberg/TRACE Indications
Prologis (PLD: A3/A-) is perhaps the single strongest credit in the entire IG REIT universe, as the most prominent industrial/warehouse operator in the world. PLD has over $50 billion in gross real estate properties as of year-end 2020 after closing on the acquisitions of Liberty Property Trust and Industrial Property Trust. While its tenant base is highly diverse, the company’s single largest customer is Amazon, which will tell you a lot about their ability to not just weather the difficult operating environment over the past two years, but their position to benefit from the long-term secular trends of e-commerce and direct-to-customer fulfillment.
PLD owns nearly 4,200 operating properties worldwide valued at just under $44 billion through June this year. The company also has sizable development operations but with a proven track record and mitigated risk through extensive pre-leasing and pre-funding of its projects. The development portfolio was $2.2 billion as through March 2021, with an additional $2.0 billion in land holdings and $3.4 billion in other real estate investments. Development starts were $610 million in the second quarter, with over $3 billion planned for this year.
PLD recently reported second quarter results, with net earnings per share of $0.81 ahead of the consensus estimate. Funds from operations (FFO)/share results beat estimates and PLD raised full-year guidance in each of the last two quarters. The company is benefitting from the rebound in economic activity, highlighted by restocking and inventory builds by its customers. Revenue was down 9% year-over-year in the second quarter, but due to a 1-time item in the prior year period, as top-line performance also came in ahead of expectations. Perhaps most impressive has been the extraordinary rent growth reported by PLD as demand for its properties increases. The net effective rent change in the second quarter of 2021 was 31.5%, with a cash rent change of 15.5%.
Occupancy improved to 96% in 2Q21 up from 95.4% in the previous quarter. That level is only down modestly from a pre-pandemic peak of 96.5% at YE2019. Meanwhile, rent collections remained close to 99% throughout the peaks of the pandemic-related economic downturn, an indicator of the stability of PLD’s operating portfolio.
PLD boasts a strong liquidity position commensurate with its ‘A’ ratings. The company has approximately $5.5 billion available on its various credit facilities, the bulk of which is available through 2023, plus an additional $600 million in cash on the balance sheet as of March 2021. PLD has only a small loan maturity this year, with just $680 million due in 2022. The remainder of PLD’s maturity schedule is well-laddered, as they frequently access the public debt markets across multiple currencies to manage liabilities. They were in the market very recently with a multi-tranche JPY deal, and last tapped the USD debt market with a new 10-year launch back in February of this year.
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