Prologis (PLD -1.15%) continues to benefit from robust demand for industrial real estate. That helped the real estate investment trust (REIT) post another strong quarter, capping an excellent year.
Overall, its core funds from operations (FFO) per share grew by nearly 18% in the fourth quarter, enabling it to deliver 14% growth for the year. It has now delivered an average of 10% core FFO per share growth over the last five years, outpacing other logistics REITs (8% on average) and the REIT sector as a whole (3% on average).
And the industrial REIT doesn't expect that above-average growth to stop anytime soon. It sees several growth drivers that should enable it to expand its core FFO per share at a healthy rate for years to come.
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Three nearly insatiable demand catalysts
Prologis' CFO Tom Olinger discussed what's driving the company's outsized growth on the company's fourth-quarter conference call on Jan. 20. He stated:
Demand is fueled by three forces. First, overall consumption and demographic growth require our customers to expand. Second, customer supply chains are still repositioning to address the massive shift to e-commerce as well as preparing for higher growth and service expectations. And third, the need to create more resiliency in supply chains. Inventory to sales ratios are more than 10% below pre-pandemic levels. Our customers not only need to restock at this 10% shortfall but build additional safety stock of 10% or greater.
As Olinger points out, demand for logistics real estate is benefiting from several tailwinds. For starters, a growing global population and expanding middle class are driving increased consumption, necessitating more industrial real estate to support this economic growth. On top of that, the shift to e-commerce is driving increased demand for logistics properties, especially last-mile facilities that enable faster delivery of online orders.
Finally, the pandemic and related supply chain disruptions have caused a monumental mindset shift. Companies are changing their inventory practices from having enough on hand to deliver it "just in time" to have a bit more on hand "just in case."
This combination of catalysts "has the potential to produce 800 million square feet or more of future demand in the U.S. alone," according to Olinger. "Collectively, these forces have placed a premium on speed to market and flexibility, driving demand for years to come."
Unstoppable growth ahead
Prologis has been a key beneficiary of these demand drivers, which have enabled the industry leader to capture significantly higher rental rates as existing leases expire. It's also moving forward with more development projects.
Olinger noted on the call that rents in the company's portfolio grew 18% globally and 20% in the U.S. last year. However, because the company signs long-term leases, it's not yet receiving the full benefit of these higher market rental rates across its portfolio. The CFO noted that this "current rent spread represents embedded organic NOI of more than $1.2 billion, or $1.55 per share, that we will capture without any further market rent growth." That's meaningful upside for a company that generated $3.4 billion in annual NOI last year.
In addition to its embedded rent growth, there's still upside ahead for rental rates. Due to strong demand and low vacancy levels, the company sees rents rising another 10% globally and 11% in the U.S. this year.
On top of the rent growth still ahead for its legacy portfolio, Prologis will benefit from the growing global need for more logistics space. The company expects to invest a net $2.3 billion in additional development projects this year. It has a knack for earning outsized returns from development, noting that it stabilized $2.5 billion last year, creating an estimated $1.3 billion of value for investors.
Meanwhile, Prologis has a long development runway. It has a vast land portfolio to support an additional $26 billion of future development. That's a big competitive advantage, since land suitable for logistics real estate is becoming increasingly costly and hard to find.
Prologis is a real estate growth stock
These growth drivers have Prologis forecasting that it could grow its core FFO per share by more than 20% in 2022. Meanwhile, with those catalysts unlikely to go away anytime soon, Prologis should be able to deliver outsized growth for several years to come. That makes it a great REIT for growth-focused investors to consider.
