On Monday, Goldman Sachs adjusted its stance on ProLogis (NYSE: PLD) stock, shifting from a Buy rating to Neutral, and simultaneously reducing the price target to $132 from the previous $142. This decision follows ProLogis' third-quarter earnings for 2024, leading to revisions in the company's financial model and expectations.
The updated outlook suggests a protracted period of slower market rent growth, which is projected to keep same-store net operating income (SS NOI) growth below 5% for 2025, along with a delay in development starts.
The downgrade reflects concerns over macroeconomic uncertainty, including fluctuating interest rates, geopolitical instability, the recent US election outcomes, and environmental disasters. These factors have caused tenant decision-making and leasing activities to stall, a trend that is expected to extend into 2025.
The anticipated near-term softness in the industrial market is likely to result in negative revisions to estimates, hindering the potential for significant expansion in the company's trading multiples.
Goldman Sachs acknowledged that ProLogis' rent mark-to-market remains high, though it has decreased compared to recent times. This is expected to contribute to above-average earnings growth for the company, with an estimated 7.2% core funds from operations (FFO) growth in 2025, excluding promotes.
This figure surpasses the average growth rate of 6.0% across Goldman Sachs' real estate investment trust (REIT) coverage. Despite this, the firm does not foresee this factor as a primary catalyst for the stock's performance in the near term.
In other recent news, Prologis (NYSE:PLD) reported a core funds from operations (FFO) of $1.45 per share in its Q3 2024 earnings call, slightly beating market expectations. Despite a challenging global market environment, the industrial real estate firm maintained a robust period-ending occupancy of 96.2%.
Prologis also saw significant rent changes, with net effective rent change at 68% and cash rent change at 44%. However, global market rents decreased by approximately 3%.
The company has adjusted its future guidance, tightening projections for average occupancy and same-store growth, while reducing development starts guidance due to slow market decision-making.
Conversely, Prologis increased its acquisition guidance, signaling confidence in strategic growth opportunities. The firm raised $4.6 billion in new debt and initiated over $0.5 billion in development projects.
Prologis management expressed confidence in long-term growth prospects, despite near-term challenges like soft rent growth and increased vacancies. Factors supporting this outlook include low overall vacancies, reduced supply deliveries, and a significant lease mark-to-market potential of 34%.
As per the analysts, the company anticipates a gradual recovery in demand as market fundamentals stabilize, with vacancies expected to peak in late 2024 before improving into 2026.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Goldman Sachs' downgrade of ProLogis (NYSE: PLD). Despite the downgrade, ProLogis maintains a strong market position with a market capitalization of $115.33 billion. The company's P/E ratio of 37 (adjusted to 51.84 for the last twelve months) aligns with Goldman's observation of high trading multiples, potentially limiting further expansion.
InvestingPro Tips highlight ProLogis' consistent dividend performance, having raised its dividend for 10 consecutive years and maintained payments for 14 years. This track record, coupled with a current dividend yield of 3.13%, may provide some stability for investors amid the macroeconomic uncertainties mentioned in the article.
However, the InvestingPro data also reveals a modest revenue growth of 0.81% over the last twelve months, which could support Goldman's concerns about slower market rent growth and its impact on same-store net operating income. The company's high return over the last decade, as noted in the InvestingPro Tips, suggests a history of strong performance that investors will be watching closely in light of the current challenges.
For readers seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for ProLogis, providing a deeper understanding of the company's financial health and market position.
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