On Wednesday, Morgan Stanley (NYSE:MS) reiterated its Overweight rating on ProLogis (NYSE:PLD) with a price target of $141.00. The firm's analysis suggests that ProLogis' recent guidance cut is primarily due to a decrease in net absorption guidance, which was previously identified as a potential risk. This adjustment is expected to result in a downward revision of same-store Net Operating Income (NOI) growth by 150-200 basis points for the year 2024 estimates (24e) and 2025 estimates (25e). Furthermore, Funds From Operations (FFO) growth projections are likely to be lowered by 1-2% for 24e and to a low to mid-single-digit range for 25e.
ProLogis has historically traded at a premium of +7% to +40% over the Real Estate Investment Trust (REIT) group, with a five-year average of +27%. The company's updated demand outlook suggests a net absorption as a percentage of stock of 0.7% for 24e, based on the latest non-manufacturing PMI index. This forecast, in conjunction with CBRE's predictions for completions, points to an expected availability rate of 8-8.5% in the fourth quarter of 2024. In such scenarios, rent growth has been historically flat.
The original demand outlook for 24e, which was approximately 1.5% of stock, underpinned ProLogis' projections for an acceleration in same-store NOI in the years 2025 and 2026. The company had previously anticipated a +8.5% increase in cash same-store NOI for 24e, which has now been revised to +6.75%. The expected average cash same-store NOI growth from 24e to 26e was +9.5%, suggesting an acceleration in the latter years. However, with the revised demand outlook and the cut to cash same-store NOI growth, the internal growth forecast may face downward pressures.
Morgan Stanley notes the strong correlation between lease mark-to-market (MTM) and industrial REIT multiples, indicating that the shares may experience near-term pressure. The firm will be seeking further details on the company's expectations for market rent growth, which was previously guided to average between +4-6% from 2024 to 2026, during the upcoming earnings call.
InvestingPro Insights
The recent Overweight rating by Morgan Stanley on ProLogis (NYSE:PLD) with a target price of $141.00 is underpinned by a blend of financial metrics and industry positioning. ProLogis has been a consistent performer in terms of dividend reliability, as highlighted by an impressive track record of raising its dividend for 10 consecutive years and maintaining payments for 14 years. These InvestingPro Tips underscore the company's commitment to shareholder returns, even as it faces a challenging period with anticipated sales decline in the current year.
InvestingPro Data further reveals that ProLogis has a market capitalization of $101.49 billion and trades at a high earnings multiple, with a P/E ratio of 32.74 and an adjusted P/E ratio over the last twelve months as of Q4 2023 at 46.75. Despite the high valuation, the company's gross profit margin remains robust at 75.87%, indicating efficient operations and profitability over the last twelve months.
In light of the recent guidance cut and the adjustments in same-store Net Operating Income growth, these metrics and ProLogis' status as a prominent player in the Industrial REITs industry provide a comprehensive picture for investors. For those seeking to delve deeper into ProLogis' financial health and future prospects, InvestingPro offers additional insights and tips. Use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and discover the nine additional InvestingPro Tips available for ProLogis at https://www.investing.com/pro/PLD.
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