Prologis: An Investor’s Answer To Supply Chain Strains And Ecommerce Growth

Summary

Prologis is the global leader in logistics real estate.

This places the company in a position to capitalize on ecommerce demand and as a pure play on current supply chain problems.

An investment grade debt rating and a well covered dividend are two of many reasons the stock stands out among REITS.

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JHVEPhoto/iStock Editorial via Getty Images With 5,500 customers and nearly a billion square feet of properties and projects devoted to business-to-business and retail/online fulfillment, Prologis ( PLD ) is an investment well suited to benefit from the supply chain crisis and ecommerce growth.

The surge in demand resulting from a strained supply chain system is driving occupancy rates higher. In turn, this gives PLD leverage to raise rents, and opportunities to invest in new development projects. As a consequence, management recently raised guidance for both revenues and demand. An Overview Of Prologis

By square footage, PLD operates 4.8% of the warehouse and distribution space in the U.S. Although approximately 80% of the REIT’s net operating income flows from its U.S. properties, Prologis also has operations in nineteen countries and four continents.

This geographic diversification is coupled with a wide range of customers: aside from Amazon ( AMZN ), which constitutes 4.5% of rents, no other company accounts for more than 1.3% of revenues. In toto, the top ten customers provide 13.8% of net effective rents while the top twenty-five contribute 20.5% of rents.

Prologis focuses on high-barrier, high-growth markets. Ecommerce customers demand rapid delivery, and this requires logistic centers in close proximity to large customer bases. Herein lies an advantage for PLD in that many of its facilities are strategically located near major highways, ports, and airports.

The company’s size also provides it with a degree of leverage in regards to competing for prime land needed for development projects. A Glance At Recent Results

Third quarter results were reported in the middle of last October. Q4 results are scheduled for 01/19/2022.

Prologis beat Q3 consensus on the top and bottom line. FFO of $1.04 squeaked past analysts by a mere penny per share; however, revenue of $1.18B beat by $150 million, representing a 9.3% increase year-over-year.

During the recent earnings call, CFO Tom Olinger projected PLD will generate $1.4 billion in free cash flow after dividends, with a payout ratio below the 60% range, a very conservative ratio for a REIT.

Management also increased guidance with core FFO per share now expected to reach $4.11-$4.13 versus the previous range of $4.04-$4.08. Same-store net operating income growth is forecast at 5.75-6.00%, up from previous 5.25-5.75%.

Robust demand is leading management to increase development starts to $3.50 billion to $3.80 billion from the previous $3.05 billion – $3.35 billion. Building acquisitions are expected to reach $1.20 billion to $1.40 billion, an increase from the $700 million to $900 million.

In Q3, rents increased by 7.1% for the company’s U.S. properties. Average occupancy hit 96.6%, up 60 basis points sequentially. By quarter’s end, PLD properties were 98% leased.

Development starts totaled $1.4 billion, with 31 projects in 21 markets. Management estimates this will result in value creation of more than $520 million. The company’s owned and managed land portfolio provides potential for 180 million square feet of warehouse and distribution space and more than $21 billion of future build out potential. “In the third quarter alone, rents grew 7.1% in our U.S. markets, far exceeding our expectations. We are increasing our 2021 market rent forecast significantly to an all-time high of 19% in the U.S. and 17% globally, both up approximately 700 basis points.” CFO Tom Olinger Where Current Trends Lead

The above quote reflects the fact that current supply chain dislocations and increased ecommerce demand has companies scrambling to secure logistics space. In turn, this leads to the increased rents we see in PLD’s recent results as well as the company’s ramp up in development starts.According to Morningstar, e-commerce requires 3X the distribution space of brick and mortar retailers, and it is estimated that 1.25 million square feet of logistics space is required for every $1 billion increase in online sales.The following chart provides insight into the expected growth in US ecommerce sales for the first half of this decade.Source: Data from Statista , chart by authorMeanwhile, the global ecommerce market is projected to increase by $1 trillion over the same time period.This data is buttressed by eMarketer’s forecast for US direct-to-consumer […]

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