Prologis Series Q Preferred: Not At These Prices (PLDGP)

Summary

Prologis (PLD) is the largest owner/operator of industrial real estate in the world. It is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of Q2 ’24, it owns and/or manages ~1.2Bn of modern logistics facilities in 19 countries leased to a diverse base of ~6,700 tenants, largely in two major categories: B2B and retail/online fulfilment.

We have followed its Series Q preferred shares since November of last year. At that time, we found the slight premium to liquidation preference (“LP”) and 6% yield-to-call (“YTC”) relatively unappealing and rated the shares at hold. Since then, the prefs have rallied ~14% to ~$62/share, a ~24% premium to LP, implying a YTC of -1%. Given the reasonable likelihood of PLD calling these shares, we see the current valuation as extremely unappealing and are downgrading the shares to Sell.

Valuation

The Series Q preferreds currently trade at ~$62/share, ~24% above their $50 liquidation preference. They carry an annual dividend rate of 8.54%, implying a current yield of 6.9%, and have a call date of November 11, 2026 (n.b., ~$9.56/share of cumulative future dividends to the call date). These prefs are a legacy instrument issued in 1996 during the company’s infancy. Now, they are just an expensive, albeit small, liability. They cost PLD ~$5.5MM annually (n.b., ~$0.01 per common share). As a result, we expect PLD to exercise its call option in 2026 to redeem them. It has repurchased small amounts of the Qs in the past, though this has been a slow process due to its very limited trading liquidity (n.b., ~470 / $27k average daily trading / dollar volume).

As shown above, the YTC at the current price is slightly negative. In simple terms, if you bought the pref today and held it through the call date, and the company exercised the call, you would average a return of -1% p.a. This is enough for us to downgrade the shares to a Sell.

Given the bond-like nature of preferred shares, no potential catalysts could change our minds at this price. The valuation would need to come down, closer to the LP.

With debt / gross real estate assets of ~33% and debt / market cap of ~24%, the prefs are well covered. Thus, we see the main risk to the prefs as their stretched valuation.

Conclusion

Given the recent ~14% rally, PLD’s Series Q preferred shares have reached a highly unattractive valuation, leading us to downgrade them to Sell.

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