Prologis (PLD 0.72%) has seen its stock decline a huge 25% or so since hitting a high-water mark in 2022. There are a lot of factors that led to the price spike and the subsequent price decline, but there's one factor that investors shouldn't overlook: Demand for warehouses remains strong. So strong, in fact, that Prologis is looking to put its money where its mouth is.
A hidden business
Prologis is a massive real estate investment trust (REIT) with a roughly $115 billion market cap. Its 1.2 billion square feet of warehouse space is spread across four continents, with properties located in key global transportation hubs. To suggest that Prologis is vital to global trade is an understatement; it has 6,600 customers across 19 countries.
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Investors were enamored with Prologis' business coming out of the 2020 pandemic-driven bear market and economic downturn. With people stuck at home, thanks to social distancing and the work-from-home trend, online shopping activity shot up. And, with that, there was a need for more warehouses to help store and deliver all of the products that people were buying online instead of in a physical store.
The numbers remain pretty impressive, too. For example, Prologis' first-quarter 2023 occupancy was a very robust 98%. It was able to increase rents on expiring leases by a massive 68% across its entire portfolio and an even higher 78% in the U.S. market. At this point, the company expects the strength to roll over into 2024. That means that lofty funds from operations (FFO) growth, which hit nearly 12% in the first quarter, could continue for longer.
And yet recent uncertainty about the economy has caused some investors to sour on the warehouse sector. This sets up an interesting dynamic.
Buying while others are selling
In addition to owning a portfolio of properties, Prologis also operates various open-ended funds that invest in warehouses. It earns management fees for this work, which largely serves institutional-level customers that want more direct ownership of properties. Prologis is facing redemption requests from some of these customers.
There's a nuance here, however, because the redemptions aren't really due to poor performance. Indeed, as noted above, the warehouse sector is still performing quite well. Prologis attributes the withdrawals to asset allocation rebalancing among its open-ended fund customers, as stock prices and bond prices have both been weak over the past year or so. That resulted in an overweight allocation in real estate for many institutional investors. But some real estate sectors have been performing really poorly, like office properties. So it is more attractive to sell better-performing assets that are more liquid and won't lead to exaggerated capital losses. So warehouses, which continue to perform well, are being sold.
Prologis clearly knows the properties it operates in the open-ended funds quite well. It likes them and, instead of liquidating assets in these funds to meet redemption requests, it is looking to increase its stake in the open-ended funds as its partners ask for their money back. Essentially, Prologis likes these portfolios enough that it is willing to buy more of them. That, of course, is driven by the strong performance of the warehouse property niche that's on clear display across the REIT's owned portfolio. In many ways, this is an easier way to invest in the warehouse space than buying new properties or building assets from the ground up.
At the edges
To be fair, Prologis is a giant company and the open-ended funds aren't the main driver of performance. So investors shouldn't view this as a massive business mover. However, it is a huge vote of confidence from management in its own ability and places an exclamation mark of sorts behind the company's view that the future remains bright for warehouses. If you are looking at Prologis, or another warehouse REIT, this news is far more positive than you might think when you read that the company faces redemption requests in the open-ended funds it manages.
