Key takeaways: Following PLD's 2Q21 print, we are following up with some thoughts and key points from the quarter:
- First on the ~17% positive in-place mark-to-market - this translates into roughly ~$700 million of incremental NOI, or roughly ~21% of the existing ~$3.3 billion run-rate, which will flow into results in the coming years as in-place rental rates are repriced higher. Just working through some simple math, on average 12-15% of PLD's leases expire per annum for an average duration of ~7 years. Assuming this $700 million remains static (it won't) and flows in ratably across those 7 years, the unlevered NOI growth CAGR would be ~3% and earnings CAGR in the mid-single digits after operating and financial leverage. This growth is effectively locked in, and comes BEFORE (1) any contribution from the ~$18 billion development portfolio (another ~$1 billion of NOI potentially assuming a 6% yield) or (2) growth in Strategic Capital AUM which has compounded in the low-to-mid teens since the AMB merger. So stepping back at a high-level which we think is helpful, the BASELINE compounded earnings CAGR assumption over the next 5-7 years needs to be in the high-single-digits. That is very hard to find in REITs with a high degree of confidence.
- On Strategic Capital we took a shot in our Black Book at dis-aggregating PLD and valuing the platform separately. It is clear to us that we were probably too conservative on several fronts, and that value (depending on the required return) could be $8-8.5bn which equates to a mid-20x forward earnings multiple (see Figure 1 below). Again, we are choosing our own required return here at 10%, so a traditional CAPM model would likely spit out a higher number. We are valuing an assumed ~$50 million of annual recurring promotes separately at ~10x.
- Lastly we included some GIP backtest information - PLD does pretty well in Quad 4 and very well in a shallow Quad 4 historically. But perhaps more importantly, we think it is important to consider that PLD represents a much larger portion of the REIT index now versus past cycles, so there could be some reflexivity to the upside under a bullish REITs scenario. As we mentioned previously, the only reason that PLD is not in our highest conviction long bucket at these prices is the consensus bullish call.
Figure 1: Strategic Capital Valuation
Figure 2: PLD Quad Backtest
Figure 3: PLD Expected Value by Quad
Figure 4: PLD % Positive Ratio by Quad
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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