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Prologis Plans for the Expansion of E-commerce

[Updated: Nov 16, 2020 ] Apr 28, 2020 by Deidre Woollard
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Prologis (NYSE: PLD) is one of the biggest logistics and warehouse real estate investment trusts (REITs) in the world. It owns nearly one billion square feet of industrial real estate, spread out over 19 countries, and was one of the largest REITs by market cap in 2019.

Industrial real estate was the top growth sector in commercial real estate last year and was positioned to have another strong year before the coronavirus outbreak hit. Because of its focus on warehousing and supply chain management, it might be particularly well positioned to ride out the COVID-19 crisis. Its most recent earnings report gives a glimpse into how the warehouse giant sees the future.

Like most other companies with a large number of tenants, Prologis has received its fair share of rent deferral requests. These requests represented 4.3% of gross annual rent, and so far Prologis has granted just 7% of those requests, which works out to $18 million in rent deferrals so far. It expects all of these deferrals to be paid back by the end of this year. Prologis had collected 85% of its rent in April as of the time of the earnings report. The average deferral so far has been 33 days.

Prologis has customers across a variety of sectors, so it is seeing firsthand how this economy impacts various industries. Chief Investment Officer Eugene F. Reilly reported that 60% of its customers are growing and 40% are shrinking. As you might expect, customers that traffic in consumer staples are in need of more space, while those that are apparel or home goods brands are facing headwinds. This may be temporary, but it could also spell doom for some smaller brands.

Space for an e-commerce universe

Prologis is betting on the growth of e-commerce -- not just in the short term, but for the long haul. It reported that e-commerce now represents a 40% share of new leasing versus 23% before the crisis. However, the company is also anticipating that other customers will not be so fortunate, and so it is not planning acquisitions or speculative development. In the first quarter of 2020, it started $300 million in new developments, but 85% of those were pre-leased.

The company is forecasting that in the U.S. in 2020, supply will total 225 million square feet, down 18% year over year. Net absorption will hit the lowest level since 2010, down by 55%. Both the U.S and Europe will see vacancy rates increase (5.4% for the U.S. and 5.2% for Europe).

Because the company is shifting its deployment plans, it is lowering its 2020 core FFO guidance midpoint by $0.11.

Metric Q1 2020 Q1 2019 Change
Core FFO per share $0.83 $0.73 13.7%
Occupancy % 95.5% 96.8% (1.3%)
Dividend per share $0.58 $0.53 9.4%
Rental revenue $879 billion $697 billion 26.1%

Data source: Prologis

Looking toward the long-term

When asked about long-term prospects for Prologis, Reilly was clear that much depends on when a COVID-19 vaccine becomes available, saying, "I think our business is going to be somewhat slower before the vaccine and much higher after the vaccine."

Prologis, like most companies, is in wait-and-see mode. Its success depends on how fast its customers see demand bounce back. A fast recovery will lead to more expansion. Another factor Prologis is considering is whether one of the aftereffects of the COVID-19 outbreak will be that more manufacturing will shift stateside. If this is the case, and if companies decide to hold more inventory, this could be good news for its business as a whole.

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Deidre Woollard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.