Prologis: A REIT Gem For Good And Bad Times (NYSE:PLD)

Prologis, Inc. (NYSE:PLD) profits from the growth of eCommerce and logistics-related businesses and has built a successful, globe-spanning, real estate empire.

Prologis’ predominant focus on logistics facilities around the world, particularly in the United States, has led to above-average funds from operations growth for the trust in recent years.

International expansion and a fast-growing dividend are two very good reasons to consider investing in Prologis, though Prologis’ 3% dividend is not cheap.

The trust does sell for high funds from operations multiple but taking into account Prologis’ double-digit growth in core funds from operations and expansion drive, I think that the trust is a compelling buy for passive income investors that look for yield, but also capital growth.

A Global Industrial Growth REIT

Prologis is a global real estate investment trust in the truest sense of the word. The trust cut its teeth in the United States but has increasingly expanded into other markets, including into Europe, Asia, and South America.

As of the end of the fourth quarter, Prologis owned a total of 1.2 billion square feet of real estate space around the world, though the trust’s key market remained the United States.

About 14% of Prologis’ net operating income was derived from markets outside of the United States as of the fourth quarter (and on a run-rate basis), according to the trust’s freshly released 4Q-23 earnings.

So while the lion’s share of Prologis’ net operating income still derives from the U.S., there is a very attractive growth opportunity lurking around the corner for the real estate investment trust in non-U.S. markets.

The trust has acquired new properties abroad to grow the reach of its real estate empire but is also taking advantage of growing demand for logistics facilities in other geographic markets.

What has fueled Prologis’ above-average growth, in terms of core funds from operations, in recent years, and which I think will continue to be a main catalyst moving forward, is the growth of everything eCommerce related.

Freight carriers, logistics companies, eCommerce companies obviously profit from the growth of eCommerce transactions with their products being distributed through the industrial value chain and then transported on last-mile transfers to customers. Thus, it is no surprise that Amazon is Prologis’ largest tenant, responsible for 5% of the trust’s rent.

The eCommerce outlook, for the industry that is, is positive, too, with Oberlo anticipating solid growth at least until 2027. With a rising share of eCommerce retail sales expected to transpire in the next four years, companies like Amazon as well as other logistics service providers are set to profit from fundamental tailwinds which should turn out to also support Prologis’ logistics real estate portfolio.

The economics underpinning Prologis’ above-average funds from operations growth are reflected in strong price increases measured on a net operating income basis.

As of 4Q-23, Prologis’ same-store net operating income growth amounted to 8.5%, suggesting that industrial trusts have considerable strength in lease negotiations which traces back to growing demand for industrial real estate space.

Above-Average Core FFO Growth

Prologis produced $5.3 billion in core funds from operations in 2023 which represented a 27% jump compared to 2022. Acquisitions are key to the trust’s growth and passive income investors should anticipate a steady stream of property purchases moving forward.

Importantly, the focus on logistics real estate has led to Prologis outperforming other real estate investment trusts: Prologis produced solid double-digit core funds from operations growth of 12% in the last five years which did not only outperform the REIT average but also other logistics REITs.

Prologis 2024 FFO Guidance, FFO Multiple, Yield

Prologis relayed its guidance for 2024 core funds from operations to investors yesterday and the industrial real estate investment trust sees $5.42-5.56 per share in core FFO this year. With the stock selling at $126.86 today, Prologis is presently valued at 23.1x FFO. The present yield, which is growing, is 2.7%.

A peer REIT, based on business strategy, is STAG Industrial, Inc. (STAG) which is selling for a much lower core FFO multiple of 15.7x. The STAG FFO multiple is based on a 5% growth estimate for the trust’s funds from operations in 2023 and uses a stock price of $37.47.

STAG Industrial is a small REIT and doesn’t have as large a real estate footprint as Prologis. It is also not globally-oriented and may therefore be viewed as riskier than its much bigger cousin. Prologis is much larger than STAG Industrial (17x based on market value) and is more diversified which I would argue also justifies a premium.

Why My Prologis Investment Thesis Might Be Proven Wrong

Prologis has a logistics real estate focus which means the trust’s potential to profit from the growth of the eCommerce industry also exposes it to the industry’s downside.

Recession-related net operating income and occupancy risks are a potential source of concern moving forward as there might be slower funds from operations growth in such an environment.

My Conclusion

Prologis is a true juggernaut logistics real estate investment trust and by far the largest force in the sector.

Prologis has been able to profit from growing demand for logistics properties, thanks to the rise of the global eCommerce industry, which has then translated into above-average core funds from operations growth.

Only 14% of net operating income is generated abroad right now which obviously allows for considerable net operating income and FFO upside in the long run.

Prologis is not a cheap trust to buy, by any stretch of the imagination, but passive income investors are poised to see consistent and predictable dividend growth over the long haul, too.