Prologis' (NYSE: PLD) focus on logistics-related real estate has paid big dividends over the years. The industrial REIT, or real estate investment trust, has grown its core FFO and dividend at higher rates than other REITs over the last one-, three-, and five-year periods. Because of that, Prologis has generated a more than 200% total return during the previous five years, which has crushed the S&P 500's roughly 125% total return during that time frame.
While past performance is no guarantee of future success, the REIT believes even better days could lie ahead. Here's a look at what's driving Prologis' optimism.
Another big year ahead in 2021
Prologis recently closed the books on an excellent 2020. Despite some initial headwinds from the COVID-19 outbreak, the REIT generated $3.80 per share of core FFO, up nearly 15% from 2019. Driving that growth was its ability to capture the strong demand for logistics space through new leases, development projects, and acquisitions.
The industrial REIT expects 2021 to be another strong year. "Year-over-year growth at the midpoint…is forecasted to be more than 10%," according to comments by CFO Thomas Olinger in the fourth-quarter earnings press release. Because of that, the company expects to generate more than $1 billion in free cash flow after paying its dividend this year. That implies a low dividend payout ratio in the 60% range of its anticipated AFFO. Driving that growth will be the continued momentum of strong demand for warehouse space worldwide.
Instead of negatively impacting warehouse space demand, the pandemic has made this real estate increasingly more valuable. In the fourth-quarter earnings release, CEO Hamid Moghadam stated: "The pandemic has pushed global supply chains to their limits. Increased e-commerce adoption and the rebuilding of inventories to meet consumer demand are structural forces in the logistics environment that will take years to play out."
With more people shopping online these days, it's powering accelerating demand for warehouse space. According to Prologis' projection, every $1 billion in online sales requires about 1.2 million square feet of warehouse space to support the storage and distribution of these goods. With e-commerce sales on track to grow from roughly $700 billion last year to more than $1 trillion by 2024, the industry will need as much as 1 billion square feet of new warehouse space by 2025. To put that into perspective, it's more than Prologis' current global footprint.
On top of accelerating e-commerce growth, companies found themselves flatfooted at the onset of the pandemic because they didn't have enough inventory in storage to meet their needs when the outbreak disrupted the global supply chain. That's because most companies relied on just-in-time inventory practices that matched product delivery schedules to expected demand.
However, that strategy left businesses unable to get the inventory they needed when the global supply chain broke down. As a result, many are securing warehouse space to keep more inventory on hand if the supply chain runs into issues in the future. Since these companies are competing for space with the e-commerce sector, it will take the logistics industry years to build enough capacity to meet these dual demand drivers.
Lots more room to run
Prologis has grown its portfolio, FFO, and dividend at above-average rates in recent years, thanks mainly to e-commerce expansion. With the pandemic accelerating that trend and fueling additional demand due to a shift in inventory practices, the company should continue growing rapidly in the coming years. That makes it an excellent REIT to consider buying and holding for the next several years.