As concerns grew in 2022 that the economy might slow, Amazon (AMZN -1.14%) pulled back on the warehouse expansion plans it enacted during the coronavirus pandemic. Some investors saw that pullback and wondered if warehouses are no longer a great investment. As a result, industry giant Prologis (PLD -1.69%) saw its stock decline roughly 25% since peaking in early 2022 (roughly the same time Amazon announced its warehouse shift).
The strange thing is, Prologis continues to post record-setting financial results. Here's what you need to know about this dividend stock, including a take on whether it's a good investment.
When bad is good
Amazon is a giant company that can distort markets when it decides to put its capital to work. For example, when it announced the pullback on the warehouse front, some in the industry breathed a sigh of relief. Without Amazon sucking up massive amounts of construction supplies, key building materials would be more readily available. So while the headlines around Amazon might have seemed negative, there were clear positives to be found for those who looked closer.
Image source: Getty Images.
In fact, Prologis -- the largest warehouse real estate investment trust (REIT), with 1.2 billion square feet of space spread across four continents -- still has 98% occupancy roughly a year after Amazon announced its pullback. That's a very robust level that suggests demand remains historically high.
And it is worth pointing out that Amazon is Prologis' largest customer, representing around 7% of its portfolio at the end of 2022. That, by the way, is the exact same percentage as the year before. So it doesn't appear that Amazon's pullback has been a material direct issue for Prologis.
Some more good news
Strong occupancy and stable demand from Amazon within Prologis' portfolio aren't the only positives here. Perhaps even more exciting is that Prologis' net effective rent change in the first quarter was a huge 68.8%. That was an all-time high, with the U.S. portfolio coming in at 78.8%. Essentially, when leases were coming up for renewal, Prologis was able to materially increase what it charged for the spaces. There are two factors behind that. First, demand is obviously, still quite strong. Second, the expiring leases were at rent levels well below market rents.
Prologis' leases are generally multiyear in nature, so the rollover of expiring leases is not a one-year event. This trend will play out over several years, as management noted in a recent presentation: "As leases continue to roll to market, our portfolio would see 8-10% net effective same-store NOI for several years, assuming no further market rent growth." The quick translation there is that the rents the company receives will continue to move higher even if the broader rent growth within the warehouse sector stagnates.
Of course, warehouse rents could start to fall, which would diminish the benefit. But right now, Prologis doesn't see that happening. For example, rent is just a small fraction of supply chain costs, so moving to a new facility to save a few dollars is probably not worth the disruption for its customers.
The 30 months of "true" supply in the sector, while not quite as positive as in 2021, is still below 50. Supply below that level is supportive of rental growth. And global warehouse starts have fallen 30% from their peaks in 2022, which means the supply of new warehouses is shrinking. Given all of that, it shouldn't be too shocking to find out that Prologis is still seeing more interest in its warehouses than it did in 2019 before the pandemic.
All in, it looks like Prologis, despite investor concerns, is set to continue to post strong financial results for at least a little while longer, if not a long while.
Not cheap, but cheaper
Even after a 25% price decline, Prologis' dividend yield is still toward the low side of its historical range at 2.8%. It wouldn't be realistic to suggest it is a screaming value stock. However, the last dividend increase was a generous 10%. That's right around the average over the past decade, which is a pretty attractive figure. And there's no particular reason to think that robust dividend growth is going to end, given the industry backdrop.
If you are a dividend growth investor, this warehouse giant has proven it is worth a closer look today regardless of what Amazon does or does not do with its warehouses.
