The equity valuation of Prologis came under pressure on 24 January, when the San Francisco-based group reported fourth-quarter and annual results that were broadly in line with expectations. How so?
The warehouse and distribution centre developer has a market value of almost $28bn, and is closely watched by market observers to determine how the transport and logistics sector is faring, particularly in the Americas. Its top five customers, as gauged by percentage of net effective rent and square feet, are Amazon, Deutsche Post DHL, Geodis, XPO Logistics and Kuehne + Nagel.
While investors have fully supported this growth and income story so far, the second half of 2016 wasn’t as strong as the first half, particularly in terms of growth, although dividends continued to rise.
Its stock currently yields 3.2% on a forward basis, but it is supported by a stretched payout ratio. Meanwhile, its trading multiples based on reported earnings and adjusted operating cash flows for the year are rich, yet its equity valuation does not appear to be incredibly expensive.
First, the rise of Amazon surely played a part in its recent success on the stock market. Also on the bright side, it has plenty of options with regard to capital deployment after it secured a precious round of medium-term funding in early 2016.
Moreover, twelve-month gross revenue, which included other non-rental sales of $312m, rose 15.2% to $2.5bn, with core funds from operations (FFO), a core non-GAAP financial metric, reaching $1.4bn, up 18.5% year-on-year.
It ended 2016 with “record global occupancy” rates (97.1% in the fourth quarter of 2016 versus 96.9% in the last quarter of 2015; 2017 guidance stands at between 95.5% and 96.5%), although customer retention fell to 79.8% versus 85.9% one year earlier. One reading is that it might be focusing on bigger and more lucrative accounts and clients.
Notably, FFO in the fourth quarter was slightly below the $350m quarterly average since the fourth quarter of 2014 – in fact, FFO peaked at $402m in the third quarter of 2016. Diluted earnings per share, meanwhile, came in at $0.82 in the fourth quarter and $2.27 for the year, based on a higher share count, against $0.23 and $1.64 on a comparable basis. It said the increase was due primarily due “to improved operating conditions and higher net promote income.”
Chairman and Chief Executive Hamid Moghadam also noted the group is “now at the cusp of yet another important market transition to a phase where Prologis is ideally positioned”.
“We entered 2017 with significant embedded earnings potential from the combination of rolling in-place leases to market and building out our land bank in the world’s premier consumption markets,” he said.
Source: Transport Intelligence, January 26, 2017
Author: Alessandro Pasetti