The COVID-19 crisis has been brutal for the real estate investment trust (REIT) sector. Mall REITs are dealing with struggling retail tenants, who are finding consumers reluctant to congregate in big crowded spaces. The office REITs are hopeful that demand for office space will remain strong, while investors are unconvinced. Data REITs and cellphone REITs have actually done well in this new environment.
The other strong performer this year in this sector has been the logistics REITs like Prologis (NYSE: PLD) that own and manage the facilities that hold inventory for online retailers and other businesses. The company reported third-quarter earnings on Oct. 20, and the latest results suggest COVID-19 is actually helping it maintain and strengthen its dominance in this REIT segment. Let's take a closer look.
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Where Prologis stands
Prologis owns and manages logistics facilities with a focus on the consumer side of the supply chain. At the end of 2019, Prologis owned and managed 3,840 buildings totalling about 814 million square feet of warehouse space. About 57% of Prologis's square footage is in the U.S., with the rest primarily in Europe and Asia. Rental operations comprised about 85% to 90% of revenue in 2019, and the company's growth is driven by rolling expiring leases to market rents, which are generally rising in the company's urban areas. E-commerce is a big driver of demand for the company's space.
Adapting to increased e-commerce demand
On the earnings conference call, Chief Financial Officer Thomas Olinger described the change in the operating environment over the July-September period:
Starting with our view of the market, our proprietary data reveals that operating conditions are meaningfully better than they were 90 days ago and as a result our earnings are now ahead of pre-COVID levels. The Prologis IBI activity index rebounded sharply to more than 59 in September above our long-term average and up from 50 in June. Space utilization, which is based solely on data source[d] from our customers, was 84% at quarter end and indicates that our properties are returning to near key capacity.
Core funds from operations (FFO) for Prologis stood at $2.14 billion for the first nine months of 2020 compared to $2.16 billion for all of 2019. For the quarter, core FFO rose 9% to $689 million from $632 million in the same quarter last year. Core FFO per share fell from $0.97 to $0.90 due to an increased share count. Total revenue rose 15% to $1.1 billion.
E-commerce represented 37% of rental revenue in the quarter compared to its historical average of 21%. Demand for space is coming from both omnichannel and pure online retailers, along with third-party logistics firms and Amazon.com. Amazon accounts for about 13% of the company's new leasing.
More growth is forecast
Going forward, client companies are beginning to restock after operating with extremely tight inventory levels. The most active sectors include food and beverage, healthcare, and consumer products. Companies are looking to strengthen their supply chain networks as inventories are at record lows relative to sales. This caused Prologis to take up guidance for expected rent growth to 2%, which was an increase of 250 basis points from the prior forecast. Prologis increased its 2020 core FFO midpoint guidance by $0.045 to a range of $3.76 to $3.78 per share.
At the midpoint of guidance, Prologis is trading at 27 times FFO per share, which is on the expensive side. The company pays a quarterly dividend of $0.58 a share, which works out to be a 2.3% dividend yield. That yield is somewhat miserly for a typical REIT; however, the payout ratio is 62% based on 2020 core FFO guidance, which means the company has some room to bump up the dividend.
Prologis is the leader in the logistics space, and its 11% cumulative average growth rate has outpaced other logistics REITs by 500 basis points. The stock has been a strong performer, rising 15% year to date. COVID-19 may have permanently changed consumer behavior regarding retailers, and more commerce will be done online, at least until we have a vaccine. While the multiple is a bit high, Prologis dominates its space.
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