While 2020 has been a year to forget for most real estate investment trust (REIT) stocks, there have been a few bright spots. Data REITs and cell tower REITs have done well, as have the logistics REITs.
Prologis (NYSE:PLD) is the leader of the logistics REITs and has benefited directly from the COVID-19 crisis. Increased online shopping has increased the demand for storage space, especially near major cities. In order to provide satisfactory delivery times, inventory has to be held as close to the customer as possible. Prologis owns the properties where this inventory is stored.
That bodes well for this leader among logistics REITs and its investors in the year ahead. Here's more on why Prologis stock has some winning days in its future.
A leader in global real estate logistics
Prologis is a logistics real estate company, which owns or operates 3,840 buildings containing 814 million square feet of storage space as of the end of 2019. The company operates in 19 different countries across four continents. You have probably seen Prologis properties along the interstates -- massive warehouse-type buildings with dozens of truck bays. Prologis focuses on the consumption side of the supply chain, which means it is involved with the distribution, storage, packaging, assembly, and light manufacturing of consumer products. The company's customers are primarily retail, online fulfillment, and business-to-business transactions. Prologis's biggest customer is Amazon.com, followed by Home Depot and FedEx.
Rental operations comprise about 80% to 90% of Prologis's revenue and funds from operations (FFO). Prologis collects rent through long-term operating leases and is reimbursed for the majority of its property operating costs. The company achieves long-term growth by increasing rents, maintaining high occupancy rates, and controlling expenses. It achieves much of its growth by rolling expiring leases to current market rents.
The COVID catalyst for online shopping
The COVID-19 crisis has been a catalyst to increase online shopping volume. Unable to go to shopping malls, consumers bought more goods online. This increased demand for storage. On Prologis's third-quarter conference call, Chief Financial Officer Thomas Olinger said that operating conditions were "meaningfully better" than they were at the end of June, and the company had returned to pre-COVID profitability. Space utilization was 84% at the end of September, and properties are returning to peak capacity. Lease signings improved 31% in the third quarter and increased 4% on a year-over-year basis.
Business inventories are headed back up
An important metric for companies like Prologis to watch is business inventories. COVID-related bottlenecks and production declines caused inventories to shrink over the summer months. It looks like companies are rebuilding inventories, but the recovery still has more room to run. The rebound will provide a wind at Prologis's back for the near term, certainly for the early part of 2021.
Prologis is a global company, with about 43% of its square footage in Europe, Asia, and the Other Americas. Japan has been a bright spot, with the company reporting that vacancies had decreased to under 1% and rents were rising as a result. European vacancy rates were about 4.3% at the end of September as well. As companies rebuild inventories, vacancy rates will fall and rents will increase.
Prologis generated $2.7 billion in FFO (or about $3.64 per share) for the trailing 12 months ending Sept. 30. This means the company's stock is trading on a multiple of 25.7 times FFO. This is on the expensive side for a REIT, but Prologis doesn't have the exposure to COVID-19-driven vacancies or credit the way the mall REITs, office REITs, or apartment REITs do. If anything, the effects of the pandemic have created a tailwind for Prologis. The company also pays a $0.58 per share quarterly dividend for a yield of 2.4%. This works out to be a payout ratio of 64%, which means the dividend is amply covered.
Prologis has a difficult-to-replicate property portfolio, and its customer business models require inventory to be held as close as possible to the consumer. Even after the COVID-19 pandemic has been brought under control, this will not change. This is why Prologis will continue to win in 2021 and into the future.