Summary
- Prologis recently announced Q4 earnings, finishing off another strong year.
- They also announced a 10% dividend hike, which puts the yield at 2.9%.
- Shares are near fair value today, with a price/FFO of 23.3x.
- I'm hoping for a dip near $100, which would provide the margin of safety that I'm looking for before I start buying PLD stock.
I have had my eye on the industrial REIT sector for a while, and most companies in the sector took a beating in 2022. My most recent article was on Rexford Industrial Realty ( REXR ), a high growth REIT focused solely on the Southern California industrial real estate market. The goliath in the sector is Prologis ( PLD ), which has a market cap of $114B. Prologis has been on my watchlist for months, and I would love to own the company at the right price. Unfortunately, I didn’t have any dry powder when shares briefly dipped below $100 in October, but I plan to stay patient and look for a better entry point with a margin of safety. Last I covered PLD in June 2022.
Investment Thesis
Prologis has built an international portfolio of industrial real estate and the company has long term tailwinds that show no sign of slowing down. The company reported its annual results, showing another year of strong performance. I think shares are more are less trading at fair value today at a price/FFO of 23.3x. This is slightly below the average multiple for Prologis coming out of the 2009 recession, but the REIT is massive now. While I think Prologis will continue to grow, I think smaller industrial REITs obviously have a longer growth runway.
They also recently announced the latest in a long string of dividend hikes, a 10% bump to the previous payout. This puts the yield at 2.9% and I wouldn’t be surprised to see Prologis’ strong dividend growth continue. I think long term investors should keep holding their shares, but I’m not a buyer today. I’m hoping for a selloff to add Prologis to my portfolio. I’m looking for a dip near $100, which would put the price/FFO just below 20x and the yield close to 3.5%.
Prologis Overview
The company has a diversified portfolio, with their top 10 tenants accounting for 16% of the portfolio. They do have a fair amount of exposure to Amazon (about 7%), but that isn’t surprising given the scale of Amazon’s operations. They completed the acquisition of Duke Realty in 2022 for $23.2B, adding to their already impressive portfolio. The portfolio is still weighted towards the US, but I think the international segment will become a more significant portion of Prologis’ ABR in coming years. On top of the impressive portfolio, the company has a strong balance sheet.
Prologis has been able to borrow at very low interest rates in recent years. They have a weighted average interest rate under 2%, and over 85% of their debt is fixed rate. I think Prologis will be able to grow for years, but I do think that their massive market cap over $100B make some of the smaller industrial REITs more attractive. The company could pursue external growth opportunities (like they did with Duke), and I also think their properties should continue to see strong rent growth. The biggest reason I’m still on the sidelines when it comes to Prologis is the valuation.
Valuation
Prologis definitely qualifies as a high-quality business at a fair price in my opinion. Shares currently have a price/FFO of 23.3x, which is a turn below the average multiple. I plan to buy if shares drop to a price/FFO of 20x, which might not be cheap, but I think it represents a solid risk/reward profile. That would put shares near $100 and the yield close to 3.5%. To be fair, I might be waiting for a while, because Prologis has barely spent any time below a price/FFO of 20x in the last five years.
I wouldn’t be surprised to see Prologis trading at a 25x multiple, but I wouldn’t count on multiple expansion into the 30s like we saw in 2021 and the beginning of 2022. Growth is projected to be solid for the next couple years, but here is how I would think about Prologis: I would be a buyer around a 20x multiple and probably a seller if the multiple was north of 30x. With shares between that, I think they are a hold. While I don’t think the valuation is attractive enough to buy shares right now, Prologis has impressed me with their dividend raises over the last couple years.
Consistent Dividend Growth
Prologis has spent the last decade providing double digit dividend increases for investors. Last year’s hike was a massive 25% increase and this year they tacked on another 10%. This puts the yield at 2.9%. I think Prologis can sustain the double-digit growth rate, but I would honestly be surprised if we see another massive hike like we saw last year. One thing that I will say is that Prologis’ massive size might mean they won’t be able to match the dividend growth of Terreno Realty ( TRNO ) or Rexford for example.
Conclusion
Prologis is the largest REIT in the world, with a market cap of $114B. While I think the REIT can continue to grow, the massive size will naturally start to limit their potential growth over time. I think they will continue to look for large external acquisitions to complement their internal growth from existing properties. I think the dividend growth should continue, but I’m not buying shares yet. While it may be wishful thinking, I’m holding out for a drop near $100. This would put the price/FFO just below 20x and the yield near 3.5%. This might not happen, but that is the margin of safety I’m looking for before I buy shares of Prologis.
For further details see:
Another Dividend Hike For Prologis