2023-03-25 01:59:18 ET
Summary
- Prologis, as the market leader with a market cap of $100bn in the industrial real estate sector, is a major player in the thriving industrial real estate market.
- Prologis benefits from favorable trends, including the growth of e-commerce and the reshoring of manufacturing, which are driving demand for industrial properties.
- With a significant land bank for future development, Prologis is well-positioned for continued growth and poised to offer strong returns to investors.
Executive Summary
With approximately $7 billion in revenues and $5 billion in FFO, Prologis ( PLD ) is well-positioned to benefit from favorable trends, including the growth of e-commerce and reshoring of manufacturing. Prologis' significant land bank for future development provides a strong foundation for continued growth and the potential for strong returns to investors.
At the current price of ~$100 per share, PLD is trading at a nearly 3-year low multiple and provides a solid margin of safety, presenting an attractive entry point for long-term investors. Despite macroeconomic headwinds, PLD has demonstrated its ability to consistently deliver strong financial performance, with a track record of growing FFO and dividends. This is supported by its high-quality portfolio of industrial properties, which has performed well in both strong and weak economic environments. Additionally, Prologis' focus on sustainability initiatives and innovative technology provides a competitive advantage, further solidifying its position as a leader in the industrial real estate sector. With a promising outlook for the industrial real estate market and a robust pipeline of development projects, Prologis is well-positioned for continued growth and strong returns for investors over the coming years.
Business Overview
Prologis is a global real estate company specializing in logistics and industrial properties. The company operates in 19 countries across four continents and is the largest owner and developer of industrial real estate in the world.
The company owns and operates more than 1 billion square feet of industrial real estate and has a portfolio of approximately 5,500 properties. Prologis' main focus is on owning and managing industrial properties in the United States. Approximately 85-90% of its revenue, earnings, and FFO are generated through rental operations, with around 85% of that coming from the US. The remaining 10-15% of its revenue, earnings, and FFO are derived from an investment management business, which currently manages industrial real estate funds of approximately $60 billion in third-party assets under management. These funds are mainly invested in properties outside the US. To ensure alignment with its investors, Prologis holds unconsolidated joint venture interests of 15-50% in each of these funds (Source: Prologis Form 10-K ).
Additionally, Prologis constructs new industrial properties to add to its managed funds or for long-term ownership. To support this pipeline, the company has a significant land bank for future development, which it acquired at a total cost basis of $4.2 billion. This land bank has the potential to support an estimated future investment of $39 billion.
Prologis’ customer base includes some of the world’s largest retailers, manufacturers, and logistics companies. The company’s properties are strategically located near major transportation hubs, including ports, airports, and major highways, making them ideal for companies that require efficient distribution networks.
Prologis’ success can be attributed to its strong customer relationships, its focus on sustainability, and its commitment to innovation. The company has been recognized for its sustainability efforts, including being named the top global real estate company in the 2021 Global Real Estate Sustainability Benchmark (GRESB) for the tenth consecutive year (Source: GRESB ).
In addition to its core real estate business, Prologis also operates a number of related businesses, including a global logistics venture with DHL and a venture capital arm that invests in startups focused on technology and innovation in logistics and supply chain management.
Prologis' assets are considered high quality due to their strategic location, modern design, and high occupancy rates. The company owns and operates industrial properties in key logistics markets worldwide, including in North America, Europe, and Asia. These properties are strategically located near major transportation hubs, such as ports, airports, and highways, which enables efficient and effective transportation of goods.
In addition, Prologis' properties are designed to meet the demands of modern logistics, including features such as high ceilings, ample truck court space, and state-of-the-art security systems. These modern design features make the properties more attractive to tenants, who are seeking efficient and modern spaces to support their operations.
Financial Performance
Furthermore, Prologis' properties have consistently high occupancy rates, which is a testament to their quality and desirability. As of February 2023, Prologis had a global occupancy rate of 98%, which demonstrates the strong demand for the company's properties (Source: Prologis Form 10-K) .
In an inflationary environment, Prologis' assets are also well-positioned to perform. This is because the company's leases are structured with annual rent increases that are typically tied to inflation, which provides a hedge against inflationary pressures. Furthermore, the company's focus on high-quality assets in key logistics markets provides a natural inflation hedge, as these properties are in high demand and can command higher rental rates.
Over the past decade, Prologis has delivered a strong performance, outpacing its peers and the S&P 500 index. From 2012 to 2021, PLD stock price has increased by approximately 400%, significantly outperforming the S&P 500, which has increased by approximately 200% over the same period.
Prologis' strong performance can be attributed to a number of factors, including its focus on owning and operating industrial properties in key logistics markets, which has positioned the company well to benefit from the growth of e-commerce and the global supply chain. In addition, Prologis has maintained a disciplined approach to capital allocation, investing in high-quality assets with strong cash flows, while also returning capital to shareholders through dividends and share buybacks.
Prologis' performance has also been notable compared to its peers in the industrial real estate sector. While other companies have struggled to adapt to changing market conditions, Prologis has been able to stay ahead of the curve, maintaining its position as the largest owner and developer of industrial real estate in the world.
Prologis is well-positioned to benefit from several tailwinds that are expected to support its growth and continue to drive FFO higher. One key tailwind is the growth of e-commerce, which has increased demand for industrial properties as retailers look to expand their distribution networks to support online sales. According to eMarketer, global e-commerce sales are expected to reach $5.4 trillion by 2022, up from $3.5 trillion in 2019.
Another tailwind for Prologis is the increasing importance of logistics as a critical component of global supply chains. As companies look to optimize their supply chains and reduce costs, they are increasingly relying on efficient and modern logistics facilities, which are Prologis' specialty. The growth of global trade and the increasing complexity of supply chains are expected to continue to drive demand for Prologis' properties.
Additionally, Prologis is well-positioned to benefit from the ongoing shift towards sustainability and energy efficiency. The company has made significant investments in renewable energy and energy-efficient building design, which not only supports its ESG goals but also provides cost savings for tenants and improves the competitiveness of its properties.
Overall, these tailwinds are expected to support Prologis' growth and drive FFO higher. According to the company's 2021 Investor Day presentation, Prologis expects FFO per share to grow at a compound annual growth rate ((CAGR)) of 8-10% through 2025, driven by strong market fundamentals, accretive development, and operational excellence.
Valuation
Prologis' ability to offer strong returns over the coming three years is supported by several factors, one of which is the company's ability to underwrite full mark-to-market of its commercial leases. This means that Prologis has the opportunity to increase rental rates significantly on leases signed before 2021, as rents have grown in the high teens to low 20's annually over the past two years. This is because, when signing a commercial lease, the tenant locks in a rental rate for a long period, and the rental rate is often flat for the entire lease term.
Moreover, Prologis signed 174mm SF of new leases in 2022, which accounts for 18% of its total portfolio, at a 51% net effective premium and 32% cash premium to expiring rents. This suggests that renewal and new-lease tenants are shouldering more of the CapEx burden and requiring fewer concessions than they did for first-gen leases. This phenomenon is a big positive for Prologis as it means the company can increase its net effective rent change, which is essential for driving rental income growth.
In addition, Prologis' management has been conservative with their rent growth estimates in the past, which suggests that there is upside potential to their projections. The company's 2022 10K mentions a 67% net effective LMTM, up 5 points from 62% in the NAREIT presentation just three months earlier, despite another ~5% of the total rent roll marking to market over that period.
In addition to Prologis' strong fundamentals and growth potential, the company's stock is also attractive from a valuation perspective. With a market cap of $100 billion and over $5 billion of FFO, Prologis is trading at a discount compared to its peers in the industrial real estate sector. According to data from Bloomberg, Prologis has a forward P/FFO multiple of 24x, which is below the average of its peers at 26x. This suggests that the market has not fully priced in Prologis' growth potential and the quality of its assets.
Furthermore, Prologis' historical track record of generating strong returns for its investors also supports its valuation. Over the past decade, the company has delivered a total shareholder return of over 400%, outperforming both the S&P 500 and the MSCI US REIT Index. Given Prologis' leadership position in the industrial real estate market and its ability to generate strong FFO growth, the company's current valuation represents an attractive entry point for long-term investors looking to capitalize on the growth potential of this sector.
Risks
Economic downturns: Prologis is heavily exposed to the global economy, and a significant downturn could reduce demand for its industrial real estate properties, leading to lower occupancy rates, rental rates, and FFO.
Interest rate changes: Prologis relies heavily on debt to finance its acquisitions and development projects. Any significant increase in interest rates could lead to higher borrowing costs, reducing FFO and earnings.
Supply chain disruption: Disruptions in the global supply chain due to factors such as natural disasters, pandemics, or geopolitical tensions could impact Prologis' tenants and their ability to pay rent, leading to lower occupancy rates and FFO.
Conclusion
In conclusion, Prologis is a high-quality industrial real estate company that has consistently outperformed its peers and the S&P 500 over the past decade. Its assets are well-positioned to perform in an inflationary environment, and it has several tailwinds that should drive strong FFO growth in the coming years. Additionally, Prologis' ability to underwrite mark-to-market rent increases provides a significant opportunity for future earnings growth. With a proven track record of success and a clear path for continued growth, Prologis is poised to offer investors strong returns over the next three years and beyond.
For further details see:
Prologis: Leading The Way In Industrial Real Estate