Industrial real estate isn't as flashy as other property types. These properties don't glimmer in the sky like a Class A office high-rise, nor do they draw crowds of shoppers like a destination retail property. However, these facilities are in high demand by tenants who need warehouse, distribution, manufacturing, production, or research and development space. Because of that, industrial real estate can be highly profitable for real estate investors.
One of the leaders in this subcategory is industrial real estate investment trust (REIT) Prologis (NYSE: PLD). The company's global footprint of well-located logistics properties puts it in a class of its own when compared to other industrial REITs, making it a name that investors must know.
Here's an in-depth look at what investors need to know about this leading industrial REIT.
Prologis company profile
Prologis is the largest REIT focused on industrial properties. It owns modern logistics facilities in high-barrier, high-growth markets that support business-to-business commerce and retail/online fulfillment.
The company has two main revenue sources: rental and strategic capital. Prologis generates rental revenue by leasing its wholly or partially owned logistics properties to a diverse base of tenants under long-term contracts. The company also manages several coinvestment ventures, including private real estate investment funds and publicly traded REITs (Japanese REIT Nippon Prologis REIT and Mexican REIT FIBRA Prologis). These ventures generate management fees and promote income, which is the sponsor's share of a REIT's profit. In 2019, Prologis generated $2.276 billion of AFFO, including $313 million of asset management fees and net promotes.
Prologis owned (both directly and via its coinvestment ventures) 4,655 logistics buildings at the end of 2020's second quarter, which consisted of 963 million square feet of space leased to 5,500 customers. Its portfolio spans the globe, with properties in 19 countries, though the bulk of its NOI (82%) comes from the U.S., followed by Europe (10%), other Americas (5%), and Asia (3%).
Prologis' coinvestment ventures and global diversification set it apart from other industrial REITs, which tend only to own properties (either wholly or via joint ventures) in the U.S. market.
Another differentiating factor between Prologis and its peers is the strength of its balance sheet. It's the only industrial REIT (and one of a small handful of REITs overall) with A-rated credit -- A3 from Moody's (NYSE: MCO) and A- from S&P Global (NYSE: SPGI) and Fitch. That puts it one notch ahead of Duke Realty (NYSE: DRE) and two rungs ahead of most other industrial peers. This higher rating gives it more funding flexibility and lowers its cost of capital.
Prologis news and growth
Despite its large size, Prologis has been growing at an above-average pace in recent years. The REIT has expanded its core FFO per share (which excludes its promote income) and dividend at a respective 12% and 10% compound annual rate over the last five and three years. For comparison's sake, other logistics REITs only grew their FFO and dividends at an average compound annual rate of 6%, which aligned with the REIT average.
Three factors are driving this above-average growth rate: development projects, asset management fees, and acquisitions. Prologis' development program of building new logistics properties has created tremendous value for its investors over the years. In the company's estimation, its share of income from development stabilizations has increased from $571 million in 2016 to $911 million in 2019. Meanwhile, management fee income from strategic capital investments has grown from around $100 million in 2016 to about $200 million in 2019.
In addition to those organic growth drivers, Prologis has been an active acquirer of logistics real estate, making both property purchases and corporate acquisitions. In January 2020, two of its coinvestment ventures closed on the purchase of Industrial Property Trust's wholly-owned real estate assets for $4 billion, adding 236 properties and 37.5 million square feet of rentable space.
Then, in February 2020, Prologis completed the acquisition of Liberty Property Trust (NYSE: LPT) in an all-stock deal valuing that REIT at $13 billion. This acquisition of Liberty added:
- A 108 million-square-foot logistics operating portfolio.
- 4.9 million square feet of logistics development projects in progress.
- A 1,748-acre land bank with 20.5 million square feet of development potential.
- 3.8 million square feet of operating office properties and development projects.
While Prologis hasn't had any problems growing in the recent past, it did run into a slight speed bump in early 2020 as COVID-19 ground the global economy to a halt. Given the initial uncertainty, the REIT reduced its planned 2020 development starts range from $2.2 billion to $2.4 billion down to $500 million to $800 million.
The company also cut its guidance for FFO, building acquisitions, and asset sales. However, thanks to strong demand for logistics real estate, especially to support the growth of e-commerce, the company bumped up its outlook by the second quarter, with it projecting to invest $800 million to $1.2 billion on development starts in 2020. It also increased its expectations for FFO, occupancy, and same-store NOI, though most metrics remained below its initial outlook due to the global economy's overall sluggishness.
An economic slowdown isn't the only thing that can affect Prologis' financial results. Another risk investors need to monitor is competition. Several REITs and a growing number of institutional investors focus on acquiring and developing logistics real estate. Many of these companies, including Prologis, develop properties on the speculation they'll secure tenants after completion. However, if companies build too many speculative properties, it could cause an oversupply. That would have a noticeable negative effect on Prologis' ability to keep growing its FFO at an above-average pace.
Prologis' stock price
Prologis' above-average growth rate has enabled the REIT to outperform the S&P 500 in recent years. Here's a look at how the company has performed versus that benchmark and other logistics REITs during the five years from the middle of 2015 to mid-2020: