5 Reasons to Buy This Beaten-Down Industry Leader Right Now -- and 1 Big Reason to Be Cautious

With shares down by about 37% from the 2022 peak and about 20% from the 52-week high, Prologis (NYSE: PLD) could be an excellent long-term investment opportunity. And there are several good reasons you might want to take a closer look right now.

Here's a rundown of five of the biggest reasons you might want to consider adding Prologis to your portfolio, as well as one of the biggest risk factors to keep in mind.

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1. Strong results

Prologis announced its fourth-quarter results recently, and for the most part, they are rather strong. Excluding one-time items, Prologis' core funds from operations (core FFO, the real estate equivalent of "earnings") grew by 10% year over year. The company reported strong leasing activity, and its young but high-potential data center business is making impressive progress.

2. Embedded rent growth

In simple terms, many of Prologis' tenants aren't paying anywhere close to market rates for their rent. The reason is that Prologis generally relies on long-term leases (about seven years is typical), and rental rates for industrial properties skyrocketed during the COVID-19 pandemic.

So, as older leases expire and are either renewed or the property is released, rental rates are resetting much higher. In the most recent quarter, Prologis reported cash rent change of 40.1% on new and renewal leases, and as this continues for the next several years, it should be a major driver of earnings growth.

3. Development expertise

Prologis grows through both acquisitions and development, but it's the latter that is most exciting from a long-term perspective (and is the company's main focus).

Think about it this way. If you can build a property for $40 million that is worth $50 million upon completion, you've just created $10 million in value. Prologis does this on a wide scale. The company estimates that in 2024 alone, it created more than $1 billion in value between development starts and stabilizations. At the midpoint of its guidance, Prologis expects to spend about $5 billion in 2025 on development, and this cycle of value creation should continue for years to come.

4. Unmatched financial flexibility

Not only is Prologis the largest real estate investment trust in the entire market, but it has a fantastic balance sheet and fantastic credit. It has a total of $7.4 billion in liquidity, giving it tremendous flexibility to pursue opportunities as they arise, and its borrowing costs are a major competitive advantage. In fact, in the most recent quarter, Prologis issued a total of $1.5 billion in debt at a weighted interest rate of just 3.5%.

5. An inflection point could happen in 2025

Prologis' stock isn't beaten down for no reason -- industrial property values have declined and demand for industrial properties has dropped in the higher-interest environment of the past few years.

However, there's reason to believe brighter days are ahead. In the company's recent year-end 2024 earnings, CEO Hamid Moghadam reiterated his expectation that the market is near an "inflection point." In short, a combination of a strong economy and falling interest rates could be a big tailwind for Prologis.

Industry trends to watch closely

As mentioned, Prologis' management anticipates an inflection point in the industry, but for the time being, there are still some oversupply and valuation concerns to keep an eye on. For example, expectations for Federal Reserve rate cuts have moderated significantly in recent months, and commercial real estate values are inversely related to the interest rate environment.

There are also demand concerns, and the company's occupancy trends aren't exactly heading in the right direction. In the fourth quarter, Prologis reported portfolio occupancy of 95.8%, which is down 30 basis points sequentially and down 150 basis points year over year. What's more, the company's 2025 guidance calls for average occupancy of 95% at the midpoint of its range, and even at the high end, it would decline in 2025.

The bottom line

To sum it up, Prologis' recent results look incredibly strong, and there's a lot to like about the business as we head into 2025. But the stock isn't exactly down for no reason, so be sure to be aware of the risk factors if you decide to invest.

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Matt Frankel has positions in Prologis and has the following options: short February 2025 $110 puts on Prologis. The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.