On Thursday, Evercore ISI adjusted its outlook on ProLogis (NYSE: NYSE:PLD) shares, a global leader in logistics real estate, by reducing its price target on the company's stock. The new price target is now set at $123.00, down from the previous target of $136.00. Despite this change, the firm maintained its In Line rating for the stock.
The adjustment in the price target by Evercore ISI comes as a response to the current interest rate environment. The firm has increased its risk-free rate assumption within its Discounted Cash Flow (DCF) analysis from 4.0% to 4.35%. This change reflects the broader economic conditions affecting the cost of borrowing and investing.
In addition to the interest rate adjustment, Evercore ISI has also revised its valuation of ProLogis's core business. The firm now applies an Adjusted Funds From Operations (AFFO) multiple of 22 times, which is a decrease of one turn from its previous valuation method. This modification suggests a more conservative estimate of the company's future cash flows.
The applied capitalization rate within the Net Asset Value (NAV) framework used by Evercore ISI has also been increased by 20 basis points. This increase is due to the anticipated slower growth in Net Operating Income (NOI), which is a key metric in assessing the profitability of real estate investments.
The cumulative effect of these changes has led to the downward revision of ProLogis's price target. The analyst from Evercore ISI stated, "Given where interest rates are today, we raised our risk-free rate assumption within our DCF from 4.0% to 4.35% and lowered our AFFO multiple for the core business by 1 turn to 22x.
Additionally, we also raised our applied cap rate within our NAV framework by 20bp due to the slower NOI growth. As a result, our PT falls from $136 to $123." This statement summarizes the rationale behind the adjustments made in the firm's financial model for ProLogis.
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