How Prologis Became the Biggest Industrial REIT in the World

Prologis (PLD 0.60%) has grown to be the biggest industrial real estate investment trust (REIT) in the world by dominating the e-commerce warehouse space, and in its fourth-quarter earnings report, the company continued to deliver steady growth.

In this episode of "Beat and Raise" recorded on Jan. 21, Fool contributors Jason Hall and Brian Withers discuss Prologis' recent quarter and why the company is a leader in its industry.

Brian Withers: Let's talk warehouses. This one's interesting. I poked around on this one, and throughout my career, I spent a lot of my time in distribution and fulfillment warehouses, probably over a hundred of them, and I've been in a ton of Prologis building space.

Jason Hall: Well, that's because there are a ton of them. They now have a billion.

Withers: Billion?

Hall: Square feet, yeah.

Withers: Globally.

Hall: It's gigantic. That's the reason. This is a business that has executed incredibly, incredibly well. That's the reason it's now the largest REIT in the world. I believe it's in the world, definitely in the U.S. They're everywhere. Anyway, $150 billion in market cap. That's even though it's come down. It's come down over the past month or so. Great year last year, spent a lot of money. Made, I think $900 million in acquisitions last year. All the metrics, you just check it off. Revenue was up 15% in the quarter, was up double-digits for the full year. Earnings per share were up huge. This is where we have the important obligatory conversation about earnings per share versus funds from operations (FFO) per share with real estate investment trust, which is what Prologis is.

FFO is really the better metric in terms of like a profitability for a REIT because what FFO is, is you take earnings per share and then you add back in real estate-related depreciation and amortization expense. You get a real number, because real estate companies, like every other company, they depreciate the real estate even though real estate tends to appreciate in value over time. It's not like a factory or a truck you lease or a computer that eventually, you're going to have to spend a bunch of money to replace it. You don't have to replace real estate typically the same way that you do those other things. That FFO increase was 18%. That's a more realistic measure of how its earnings did, gave us funds from operations outlook for next year, between $5 and $5.10 per share FFO for next year. That's a nice increase from this year. Not a big, but it's a nice little modest increase from this year. That's positive.

Some highlights. Occupancy rate continues to be very high. Ninenty-seven percent, I think their rental rate at the end of the year. In other words, beginning this year, it's like over 98%. They continue to spend money and invest in expanding because there's so much demand for what they do. To reflect it in their same-store NOI, which is net operating income, that was up 7.5%. That's like comps, cash comps I guess is the way to think about it. In acquisitions, $900 million in acquisitions last year. I imagine they're going to make a bunch more this year. Balance sheet is great, it's incredible. They try to maintain around $5 billion in liquidity. They ended the year with about $5 billion dollars between cash and room on their credit facilities.

Check this out, man. They issued $1.5 billion in debt last year. Some of that was to pay for acquisitions, some of it was for refinancing, an average of 1.3%. Not too bad. Their average interest rate on their entire debt book is 1.7%. The average expirations is 10 or 11 years. Their balance sheet is in wonderful, wonderful shape. Honestly, I don't have any business concerns. They continue to execute well, demand for what they do, that's logistics, warehousing. We've talked about on-shoring here. All the issues with the global supply chain. They are in the catbird seat to participate in all of the things that are going to happen there. The only concerns I really have are valuation. They trade for 30 times, almost 31 times FFO. That's really expensive. The dividend yield has fallen at 1.6% as the stock price has gone up so, so much. I think as a long-term investment, five-plus, 10-plus years, investors can do OK. I'm a little concerned about volatility with the price. I think this might be a good stock to dollar-cost average into because it's trading for such a premium valuation right now.

Withers: I wanted to hit on your slide. I don't know if our members noticed it. You picked a total return for both the S&P 500 and Prologis versus just the stock price. What's the difference?

Hall: That's important. Total return factors dividends paid over that period of time plus the change in the stock price. Again, the dividend yield has fallen to 1.6% because the stock price has gone up so much. But when you buy a REIT, when you own a REIT, you want to look at the total return profile, not just the stock change because dividends are usually a really big part. Sometimes half or more of the total returns that it generates over your ownership period.

Withers: Yeah. Looking over the past 10 years, the difference between the price change and the total return is just massive.

Hall: Yeah. These folks are really good at putting cash back in investors' pockets. A big way that they do that is by managing, using a leverage model with that. But even with that, they've got a great balance sheet. I think their debt-to-assets or debt-to-equity is less than 15%. Seeing 20 or 30% on some of these REITs is not crazy. They have a really strong balance sheet.

Withers: With customers like Home Depot, Amazon, FedEx, DHL, just to name a few.

Hall: Yeah.

Withers: Those guys aren't going anywhere.

Jason Hall: They're not. It's gotten so big, it's not overly tied to any one customer. Even some of the biggest companies in the world that need massive amounts of warehousing and real estate, it's not overly exposed to any one or two different companies.