The U.S. real estate sector has been one of the worst-performing spaces in the past 12 months. The Vanguard Real Estate ETF (NYSEARCA: VNQ) fell behind the broader S&P 500 index by as much as 24% during this period. Despite some signs of recovery in the construction sector, it could be until this value reaches the real estate investment trust (REIT) level, where property values are affected.
Blackstone’s $10 billion bet on residential housing may signify pivoting sentiment in the sector. However, they count with more money than God, so they can afford to wait as long as it takes. Retail investors may not have that much time and require relatively quicker payoffs, which is why a specific brand of real estate may be the perfect choice.
A logistics and warehouse boom could soon start in the United States, and Prologis Inc. (NYSE: PLD) is at the front of this wave. Operating strictly in logistics warehouses and other such real estate, the stock could be well positioned to overtake the real estate sector as a whole, or at least that’s what markets are betting on.
The Economic Push for Logistics
Now that the U.S. manufacturing sector is starting to wake up, according to the ISM manufacturing PMI index trends, many industries will have to rely on a strong logistics network.
Pushing its first expansion reading, after contracting for 16 months, the manufacturing sector may be top of mind for professional investors and traders. Analysts at The Goldman Sachs Group Inc. (NYSE: GS) called for a breakout in manufacturing within this 2024 macro outlook report.
A lower dollar index could be in play with potential interest rate cuts from the Federal Reserve (the Fed). A cheaper dollar makes American exports more attractive to cheaper nations. Still, the U.S. can only export what's on inventory, so production needs to kick off. Connecting the dots would be impossible without two specific industries: trucking and logistics. Therefore, Prologis is being rewarded above other real estate, including residential and healthcare properties.
Spreading Property Valuations: Prologis is King
Comparing valuations against worthy REIT mentions can help investors gauge current sentiment toward Prologis. To do this, use the forward price-to-earnings (P/E) ratio, as it attempts to place a value today on tomorrow's expected earnings.
Prologis stock trades at a forward P/E of 19.3x, 32% above the REIT industry average. More specifically, it is 24% above one of the biggest names in the residential sector, Equity Residential (NYSE: EQR). This could mean that markets think logistics valuations (and earnings) will pay off before any value reaches the residential sector.
How about something less cyclical, like healthcare properties? As part of the consumer staples services, places like hospitals and clinics should have no ties to the underlying business cycle, providing safety in these rising VIX times. Still, markets find Prologis worth more than Healthpeak Properties Inc. (NYSE: DOC), valued at only 9.3x forward P/E, a discount of 51% to Prologis. Price action plays a role here, as Healthpeak stock trades at 72% of its 52-week high, while Prologis reached 87% on bullish momentum.
Wall Street's View on Prologis
Starting with price targets, Wall Street analysts see a consensus valuation of $141.7 for Prologis, nearly 20% upside from today's prices. This is a massively bullish assumption, considering real estate is a low beta sector, meaning it doesn't move much. Compare this to Equity Residential's 6% upside through its $65.3 price target and Healthpeak's 5% downside as analysts placed a $17.7 price target on it.
More than that, Prologis gives investors the additional benefit of a 3.2% dividend. While it barely beats U.S. inflation rates and is more than 1% below the ten-year treasury yield, the tradeoff comes in on how much upside the stock promises today. Even bears have decided to leave this one alone. Prologis stock short interest is extremely low. Only 1.1% of all shares are shorted, leaving the stock to be dominated by mostly bullish participants.
Topping things off, the stock is 93.5% held by institutions, a sign that pension funds and other respectable money managers find a reasonably stable investment in this stock.
