Shares of Prologis (PLD -1.57%) have tumbled nearly 30% over the past year. That has pushed the company's dividend yield up to 2.8%, well ahead of the S&P 500's 1.6% yield. The primary factor weighing down the stock is the concern that demand for logistics properties is waning.
However, as the leading industrial REIT's first-quarter numbers showcase, demand for industrial properties has proved incredibly resilient. The sell-off in the stock makes Prologis look like a screaming buy, especially for those seeking an above-average and growing dividend.
Spectacular numbers
Prologis generated $1.22 per share of funds from operations (FFO) in the first quarter. That's nearly 12% higher than the year-ago period. The primary driver was the incredible performance of its operating portfolio:
|
Metric |
1Q23 Result |
Notes |
|---|---|---|
|
Average occupancy |
98% |
Flat with 4Q22 and above 97.4% in 1Q22 |
|
Retention |
77.2% |
Down from 82.4% in 4Q22 and up from 75.4% in 1Q22 |
|
Cash same-store net operating income (NOI) |
11.4% |
All-time high |
|
Net effective rent change |
68.8% |
All-time high, led by U.S. at 78.8% |
Data source: Prologis.
As that table shows, occupancy remained very high while retention was strong. That drove an extraordinary rise in rental rates as legacy leases expired and Prologis signed new leases at much higher market rates. The company enjoyed its best-ever quarter for rent growth and NOI growth.
Co-founder and CEO Hamid Moghadam commented on the quarter in the earnings report. He stated:
We continue to deliver record results driven by the unparalleled quality of our portfolio and customer solutions. Demand remains healthy, despite some moderating in terms of decision-making. Given the macroenvironment, we continue to operate our business with a degree of caution. We foresee any potential impact on demand as likely to overlap with a deceleration in new deliveries, sustaining momentum with favorable conditions for high occupancy and continued rent growth into 2024.
As the CEO points out, the company is performing well despite an uncertain macroeconomic environment. While that's slowing some leasing decisions, supplies remain so tight that occupancy should stay high, and rents should keep rising for at least the next several quarters.
The future remains bright
That outlook is driving the REIT to give its 2023 guidance a slight bump:
|
Metric |
Previous |
Revised |
Change at the midpoint |
|---|---|---|---|
|
Average occupancy |
96.5%-97.5% |
97%-97.5% |
0.25% |
|
Cash same-store NOI |
8.5%-9.5% |
9%-9.75% |
0.38% |
|
Core FFO (excluding net promote income) |
$5.00-$5.10 per share |
$5.02-$5.10 per share |
0.2% |
Data source: Prologis.
Prologis' ability to raise its guidance, even if very slightly, is a testament to its underlying strength and conservative forecasting approach.
Meanwhile, the company remains in an excellent position to capitalize on potential opportunities that might emerge during an economic downturn. Despite tightening credit conditions, Prologis closed an additional $1 billion line of credit this month. That pushed its total liquidity position to $6.7 billion, an all-time high.
The company is also extremely well insulated from higher interest rates. Prologis has a weighted average term on its debt of 9.7 years and no significant maturities until 2026.
That gives Prologis a fortress-like balance sheet in the current environment. CFO Timothy Arndt commented: "We are well-positioned to deliver superior growth given our embedded rent upside and proven ability to create value from the build-out of our land bank."
Given the current economic uncertainty, the company continues to take a conservative approach toward new developments. Its development plans remain unchanged at $2.5 billion-$3 billion of starts this year. However, it has the land and financial flexibility to start more development projects as economic conditions improve. It also has ample capacity to make acquisitions above its $300 million-$600 million guidance range.
Durable growth despite a potential downturn
While demand for warehouse space has slowed a bit because of economic uncertainty, it remains highly resilient. Combine that with tight supplies, and occupancy levels remain high, driving robust rent growth for Prologis. These conditions should remain in place for the foreseeable.
The steep sell-off in the industrial REIT's stock makes it look like a screaming buy, especially for dividend-seeking investors. Prologis recently boosted its dividend by another 10% and will likely keep growing the payout at an above-average rate in the future.
