The COVID-19 pandemic changed a lot of thinking in corporate America. Working from home will have a big impact on management decisions, forcing a revision of corporate attitudes toward inventory management. This created a perfect storm for logistics companies like Prologis (PLD -1.15%), which had a great couple of years. Can that continue?
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Prologis is a top logistics REIT
Prologis is the biggest logistics real estate investment trust (REIT) in the United States. It is known for having massive logistics facilities in some of the best locations. If you drive down several major highway corridors, you will likely see massive structures with dozens of truck bays. These are the sorts of facilities that Prologis owns. The company owns 4,914 buildings with a total 1 billion square feet in space. Prologis focuses on high-barrier and high-growth locations and has some of the best real estate in the logistics space.
Corporate America has been rethinking its inventory policy
Prologis has benefited over the past year from a secular trend in inventory management. For decades, corporate America has bought into the concept of "just-in-time" inventory management. The idea is that companies should minimize the amount of inventory they hold in order to reduce costs. Since businesses pay up front for raw materials and it may be months before the proceeds from the final sale are realized, it is inefficient for businesses to tie up working capital in inventory.
Unfortunately, the COVID-19 pandemic exposed the limitations of this system. The pandemic disrupted supply chains, and all of a sudden companies found themselves with insufficient inventory to meet demand. Since then, companies have been building inventories, which has directly benefited Prologis.
The supply/demand imbalance has favored Prologis
The demand for logistics space is intense, and Prologis has seen a steady uptick in occupancy, from 97.1% in the third quarter of 2021 to 97.7% in the third quarter of 2022. Most notably, the rent change has been accelerating over the past year, from 27.9% at the end of the third quarter of 2021 to a whopping 57.9% at the end of the third quarter of 2022.
2022 was a banner year, and this year things will likely return to normal
There was some pressure on Prologis in mid-2022 when Amazon (AMZN -2.56%) and FedEx (FDX 1.37%) announced they would reduce their logistics capacity. On the company's third-quarter 2022 earnings conference call, Prologis CEO Hamid Moghadam addressed the issue directly. He said that Amazon had probably overcommitted to space in 2020 and 2021 and was releasing some. As of the conference call, none of the decreases were in Prologis facilities. He went on to say that FedEx is consolidating some of its ground and air operations, and that this would probably benefit Prologis instead of hurting it.
Prologis is clearly hitting on all cylinders; the past year has been super-strong, with big increases in rents and funds from operations (FFO). This will probably continue for the next six months or so, and then Prologis will return to more normal rates of growth. Investors shouldn't count on more 60% increases in rent. The problem for Prologis is that more logistics supply space is becoming available just as big tenants like Amazon and FedEx are pulling back their demand for space. The company has been increasing guidance for 2022 all year and is currently guiding for 2022 core FFO per share to come in between $5.12 and $5.14. This puts the stock at 22 times guided 2022 FFO per share. This is a premium multiple for a REIT, but Prologis is a proven leader and dominates its space. Its dividend yield is 2.8%, which is low for a REIT, but Prologis has been investing in growth. The stock is a great performer, but growth will likely slow down, and investors need to bear that in mind.
