Is Prologis a Buy?
In its nearly 30-year history, the share price of mighty real estate investment trust (REIT) Prologis (NYSE: PLD) has never been as high as it's been in recent months.
That's hardly a surprise, since the industrial properties it specializes in are in high demand, and this well-managed company is taking full advantage of the situation. But perhaps because of this Prologis stock is "overbought," as traders like to say. Does this means it's too late for investors to make some coin on the shares?
Image source: Getty Images.
The Amazon effect
Before we tackle that question, let's briefly explore why Prologis' business is booming.
The coronavirus pandemic exacerbated a trend that was already robust: consumers doing more of their shopping online, as opposed to the traditional in-person-at-brick-and-mortar-retailers variety.
While this didn't result in the "retail apocalypse" feared by many in that industry, e-commerce continued to snowball. In the five years from 2017 to 2021, annual U.S. e-commerce sales almost doubled, to just under $871 billion. Across that stretch of time, e-commerce as a percentage of total retail sales rose from nearly 13% to slightly over 19%.
The model for e-commerce these days is Amazon, which for its retail operations famously relies on a network of "fulfillment centers," (i.e., storage and distribution warehouses). Amazon's competitive edge relies, in no small part, on getting goods to customers as fast as possible, so it's always looking to get closer to its clientele. And, as with any successful company, peers are trying to replicate that business model.
So, thanks to Amazon (a major Prologis client, by the way) and its ilk, demand is extremely and sustainably high for the warehouse spaces the REIT specializes in. At the end of last year, its occupancy rate was nearly 97.5%, which is particularly robust considering the company's sprawl -- it fully or co-owns around 1 billion square feet of space in 19 countries.
Prologis' full-year 2021 fundamentals tell the tale. This well established company managed to increase revenue by 7% year over year (to nearly $4.8 billion). Its funds from operations (FFO), the most crucial profitability metric for REITs, saw even better improvement. Core (i.e., non-GAAP) FFO rose by almost 11%, to a beefy $3.2 billion.
The only real downside to investing in Prologis, as far as I'm concerned, is the company's dividend. A zooming share price over the past few years has pushed its yield down considerably. Prologis is trying to keep itself attractive as a dividend stock with a 25% hike to its payout, declared in February. But even with that boost, the resulting $0.79 per share quarterly distribution would yield about 2% at the current share price.
That's notably low for the typically high-yield dividend stocks that REITs tend to be. The shares of prominent retail REIT Realty Income, for example, currently trade at close to its one-year high but still yield nearly 4.5%. And Prologis' warehouse REIT peer STAG Industrial pays out at a 3.6% rate.
A warehouse full of growth
Then again, yield isn't everything with a stock, even in the dividend stock Shangri-la that is the REIT sector. For the entirety of 2022, Prologis anticipates core FFO of $5.00 to $5.15 per share, which would mean at least 20% growth over the 2021 figure. Average occupancy should stay high; the REIT is forecasting 96.5% to 97.5% across the year.
By the way, Prologis is not only the largest warehouse REIT on the scene by market capitalization -- it's also one of the largest REITs, period. So a 20% FFO growth rate for such an already enormous company -- in a typically slow-growth sector -- is really quite something.
It also makes the company's stock a still-compelling proposition despite the share price run-up. Prologis is a big, important player in the warehouse game, and it looks to stay that way for years to come. As such, REIT investors who can accept that modest dividend in return for outstanding growth would be well served owning the stock.
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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. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon, Prologis, and Stag Industrial. The Motley Fool has a disclosure policy.
