Real estate investment trusts (REITs) can be an excellent source of passive income as part of a diversified portfolio. Although rising interest rates have recently weighed on the real estate industry, Prologis (PLD +0.52%) is one REIT well positioned to deliver shareholders a growing dividend.
Here's what you need to know about the REIT to see if it's right for your portfolio.
NYSE: PLD
Key Data Points
Prologis benefits from the growing demand for logistics facilities
Prologis owns and operates logistics real estate properties across 20 countries, focusing on facilities located in active, high-growth markets. With over 1.2 billion square feet of properties, Prologis specializes in facilities serving business-to-business enterprises and online retail fulfillment centers, with customers including Amazon, Home Depot, FedEx, and UPS.
Over the past several years, there has been a shift toward e-commerce and building resilient supply chains, increasing demand for warehouse, storage, and distribution space. These strong trends have been a tailwind for Prologis, which we can observe from its growing funds from operations. REITs use funds from operations (FFO) to illustrate their recurring operating earnings. Over the past decade, Prologis's FFO per share has grown from $1.44 to $6.13, representing a 15.6% compound annual growth rate.
This stellar growth supported Prologis's growing dividend payment to investors, which it raised annually for each of the past 10 years. Over that period, its annual dividends per share grew from $1.12 to $3.48, or 12% compounded annually, making it a solid stock for investors looking to generate income from their portfolios.
PLD FFO Per Share (TTM) data by YCharts
Prologis could face headwinds from new supply hitting the market in 2024
Prologis benefits from robust demand for e-commerce and logistics warehousing, trends that only accelerated during the pandemic. This strong demand has served as a tailwind for the business, resulting in high occupancy rates and rising rents. Over the past few years, its occupancy rate has been over 97%. Meanwhile, from 2019 through 2023, rents have risen by 85%.
Investors will want to watch the new supply of logistics facilities hitting the market. Driven by strong demand and low interest rates, developers began building more facilities and adding to the market supply. This building peaked in 2022 before interest rates rose rapidly amid the inflationary environment. Many of these developments will start coming online in 2024, which could result in slower rent growth for the REIT.
Despite this, Prologis management is confident it can continue to grow rent and increase operating income over the coming years. The company projects rents to grow around 4% to 6% over the next few years, which should help its core FFO grow by 9% to 11%.
Image source: Getty Images.
Another positive for Prologis is its strong balance sheet, which allows it to take advantage of expansion opportunities that can drive further growth. In 2022, Prologis completed an acquisition of competitor Duke Realty for $23 billion. Last year, it acquired another $733 in properties and another $3.1 billion portfolio from Blackstone.
Is Prologis stock a buy?
In the last year, there have been concerns about commercial real estate and the impact higher interest rates could have on the industry. There are risks to vulnerable parts of commercial real estate, like office space. However, CBRE Group, one of the largest real estate companies in the world, believes that industrial REITs like Prologis are well positioned to hold up and be more stable if there is a market downturn.
Not only that, but many believe that the period of higher interest rates could be over for the time being. The CME FedWatch Tool shows the market projects the federal funds rate could come down from 5.5% on the high end to around 4% by the end of this year, which should benefit commercial real estate transactions.
Finally, ongoing e-commerce trends should remain robust for the next several years. According to Straits Research, the warehousing and storage services market is projected to grow by 7.7% annually through 2030. With these tailwinds working in its favor, Prologis looks like a solid stock to buy and hold long-term.
