The market is near all-time highs today, and a great many stocks look expensive. That's the case with industrial real estate investment trust Prologis (PLD -0.14%). In fact, the warehouse landlord often seems to trade at a premium price. However, during market sell-offs, even stocks of great companies tend to falter, which is why this REIT should be on your watch list for the next market crash. Here's why.
In the sweet spot
There's a saying in the real estate sector that sums up the business fairly well: location, location, location. Prologis is the living embodiment of this. It owns warehouses, which are, in and of themselves, fairly boring assets. However, it has a focus on key transportation hubs, like California and the New York City region. That makes its assets vital cogs in the supply chains that move products around the world.
The world, meanwhile, is not an overstatement. Prologis' portfolio isn't domestically driven, with assets in key transportation hubs across North America, South America, Europe, and Asia. To be fair, the 3,300 or so properties in North America make up a significant piece of its portfolio, but with nearly 400 properties outside of this region (sitting on a nearly equal amount of land space), there's ample diversification and room for growth.
When the coronavirus pandemic hit in 2020, nonessential businesses were shut down and people were asked to practice social distancing. Many took to the internet to buy the goods and services they needed and wanted. That sped up a long-term trend toward a more digital world. Notably, it forced some people who may have been hesitant to buy online to try it out. Product categories across the board saw material online demand boosts, increasing demand for the types of properties that Prologis owns.
But this isn't something that will be a one-time event. Yes, some demand was pulled forward, but the long-term trend remains for more retail to be handled online. Humans are social animals, so brick-and-mortar retail isn't dead. However, the shift in the way people shop is very real, and Prologis is strongly positioned to be a key partner to retailers and other suppliers looking to adapt and change with the times.
From the ground up
Growth in demand, however, is only one piece of Prologis' growth story. The real estate investment trust has a long history of building assets. To put a number on that, over the past two decades Prologis has invested $36.5 billion in new construction. Moreover, it estimates that this spending has achieved an internal rate of return of 21%! That's a pretty spectacular return and helps to explain why investors have afforded the REIT such a premium.
Indeed, the stock today yields roughly 2%. While that's higher than the miserly 1.3% you would get from an S&P 500 index fund, it is below the 2.3% dividend yield of the average REIT, using Vanguard Real Estate Index ETF as a proxy. Prologis' 2% yield also happens to be near the lowest levels in its history. That makes sense given the huge stock run-up in recent years as investors increasingly appreciated its well-positioned business model.
During the pandemic-driven recession in 2020, the stock fell more than 30%. That was, in hindsight, a solid buying opportunity. But there's one more thing here to highlight on the growth front. Prologis estimates that it has roughly $18 billion worth of construction opportunities embedded in its portfolio. That means that growth doesn't need to stop during the next market swoon. As long as the long-term trend toward online shopping and global commerce continues, this warehouse REIT has the ability to grow no matter what Wall Street is doing.
Picking your time
To be fair, Prologis is one of those names that you buy and hold for a very long time. Super-conservative investors looking to stick with the biggest and best might actually be interested in it today, even though it trades at a premium price (that said, the stock is off nearly 10% from recent highs).
However, for those that are more value conscious, a deep market sell-off would likely be a better time to buy in. And that's why you want to have this name on your watch list right now, so you are prepared to act when others are running scared. You just need to remember that Prologis is positioned to take advantage of huge shifts in the way commerce and trade happen on a global scale, notably built-in growth opportunities that it can act on no matter what is going on with stocks more broadly.