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Where Will Prologis Be in 3 Years?

Jul 07, 2020 by Brad Cartier

There's no doubt that most real estate sectors have had a turbulent 2020, and real estate investment trusts (REITs) are no different. The industrial sector, in which Prologis (NYSE: PLD) operates, has been buoyed by the strength of the e-commerce sector as the COVID-19 pandemic weighed heavily on other sectors.

For Prologis, their share price has increased 14% year over year as of July 2, 2020, despite the ongoing economic volatility. Between February and March 2020, Prologis dropped 26% to a yearly low before bouncing back to its current level.

This strong rebound has many investors wondering what the long-term prospects are for Prologis, as well as the industrial REIT sector as a whole. Here's an overview of Prologis and where it could be three years from now.

Where Prologis is now

The dividend on Prologis is currently sitting at 2.4%, or $0.58 per share. Over the past three years, the dividend has grown 32%.

Prologis owns over 4,600 properties that are leased to 5,500 tenants. They've been able to ride the wave of e-commerce, providing warehousing in 19 countries to customers such as Amazon (NASDAQ: AMZN), FedEx (NYSE: FDX), UPS (NYSE: UPS), and Home Depot (NYSE: HD).

According to their latest earnings report, Prologis' revenue jumped to $978 million in the first quarter of 2020, up 27% from the prior year.

The occupancy levels for Prologis are very high, sitting at 97% across their industrial portfolio, up 100 basis points from the fourth quarter of 2019. Occupancy rates across all REIT sectors sat at 94% for 2019.

Growth prospects for Prologis for the next three years

Short-term growth prospects are clearly bearish. On their latest earnings call, Eugene F. Reilly, chief investment officer, Prologis, noted: "Our customers in contraction are going through a short-term shock, some will recover fairly quickly, others face a longer transition to normalcy, and unfortunately, certain businesses will not survive. At the same time, the pandemic has led to significant growth for the industries I mentioned, serving the stay-at-home economy, and we continue to experience elevated e-commerce demand, a 40% share of new leasing versus 23% pre-crisis."

He added, "Our portfolio quality, customer composition, and balance sheet strength are mitigating the headwinds, and our disciplined efforts to dispose of $15 billion of nonstrategic assets over the past several years, that is paying dividends today."

There's no doubt that the rise in e-commerce, even exclusive of the current pandemic, will be the major growth driver for Prologis over the next three years. According to CBRE (NYSE: CBRE), the first quarter of 2020, net rents rose by 4.8% year over year in the industrial real estate sector, and there were also 34 million square feet of positive absorption into the market. Positive absorption means that more commercial space was leased than is available currently in the market. This means supply is dropping, which will buoy prices.

According to CBRE, vacancy rates also sit at a near-record low of 4.5%. As noted above, vacancy rates across the Prologis portfolio sat at 3% in the first quarter of 2020.

CBRE concludes that "Despite the downturn, robust fundamentals in the first quarter showcase that the U.S. industrial market was on solid ground prior to the COVID-19 pandemic. Although market conditions have shifted considerably since mid-March, there still is strong evidence of industrial sector resiliency."

Total industrial sector transactions for 2020 are 2.8% higher than the same time in 2019. This is despite the fact that transaction activity dropped 29% between March 15 and April 14.

Over the next three years, Prologis will be highly correlated with economic consumption, which is dependent on economic growth or decline. The exposure to warehousing and e-commerce means that economic consumption levels are critical to Prologis' future revenue. The economic recovery scenario will play a significant part in the power behind the Prologis portfolio.

The bottom line

With Prologis set to release second quarter earnings on July 21, keep a close eye on the effects of lockdowns and stay-at-home orders on assets under management. Are vacancy rates decreasing as they did between 2019 and 2020? Will FFO continue to increase? Will Prologis cut dividends if revenues decrease?

Given the history of dividend increases and the solid foundation of Prologis' liquidity, look for continued dividend growth. Further, as the three-year prospects for e-commerce and industrial sectors appear positive, look for Prologis to continue to experience healthy growth through strong cash on hand, developments in the pipeline, and exposure to consumer growth trends such as warehousing and e-commerce.

As it stands now, Prologis appears poised to weather the current economic downturn given a heavy portfolio reliance on e-commerce businesses and warehousing. Look for this to continue over the next three years as Prologis seeks to strategically develop and acquire new assets in a patient manner thanks to higher than usual liquidity.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. bradcartier has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, FedEx, and Home Depot and recommends the following options: long January 2022 $1920 calls on Amazon, long January 2021 $120 calls on Home Depot, short January 2021 $210 calls on Home Depot, and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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