Real estate investment trusts (REITs) are specifically structured to pass income on to shareholders. Prologis (PLD +1.09%) is no different from any other REIT in this regard, though it tends to be afforded a premium valuation much of the time. So its 2.6% dividend yield might seem a bit miserly -- until you find out that the dividend has grown at an annualized clip of more than 10% over the past decade. That's very attractive. And, given the REIT's $40 billion secret weapon, more robust dividend growth is likely in the years ahead. Here's what you need to know.
Prologis is a one-stop warehouse shop
Prologis has a market cap of around $120 billion. That is a huge figure for a REIT and makes this company one of the largest players in the broader REIT sector. However, Prologis is a very focused company. It owns around 5,500 warehouses. Looking at this from a different perspective, the REIT manages assets with over 1.2 billion square feet of rentable space.
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That's just the start, however, because its portfolio isn't just in one country -- it is spread around the world. North America, South America, Europe, and Asia are all covered, with properties in around 20 countries. All the assets Prologis owns are in important transportation hubs, which means demand is pretty strong for its properties. Better yet, with such a broadly diversified footprint, Prologis can offer its more than 6,700 customers a single business contact for multiple, geographically diverse locations.
This REIT is an entrenched giant in the warehouse sector, and it would be very difficult to unseat it. But there's one more subtle factor here that investors should keep in mind, even though it often gets overlooked. Prologis has a $40 billion investment opportunity built right into its portfolio.
How do you grow a REIT?
The REIT model is pretty simple. REITs own large physical assets and rent them out to customers. But how does one grow a REIT? The answer is just as simple: You increase the number of assets the REIT owns. There are really just two ways to do this.
The first, and most obvious, way to increase the size of a REIT's portfolio is to buy additional properties. That can happen on a one-off basis, through portfolio size transactions, or via the acquisition of a competitor. Prologis does all three.
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Key Data Points
The second way to grow the portfolio would be to build new assets from the ground up. This is a longer process and has to start with owning land on which the REIT can build something. That's the key here. Prologis owns or controls around 8,000 acres of land in North America, over 2,200 acres in Europe, nearly 1,800 acres in South America, and about 100 acres in Asia. Most of this property is near assets the REIT already operates, so the land is well located and will easily slide right into the operating asset base.
While it would take years for Prologis to build on all of that land, that's actually a net positive. It means that the REIT has years of growth already built into its portfolio. Management estimates that this is a $40 billion opportunity. But step back for a second and consider how big that really is by comparing it to the REIT's $120 billion market cap. This is a very big secret weapon and one to which investors should be paying a lot of attention.
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A growth and income stalwart
Given Prologis' 2.6% dividend yield, it probably won't be of interest to investors looking to maximize the income their portfolios generate. But the rapid dividend growth, and the $40 billion opportunity to build on vacant land it already owns, suggest that growth and income investors should probably take a closer look at this industry giant.
In the end, if you own the stock for long enough, a fast-growing dividend can provide more income than a slow-growing dividend. Prologis is the kind of company that long-term investors could learn to love more and more every year, even if they have a penchant for larger upfront income streams.
