Prologis: How Amazon's Secret Weapon Could Be Your Next Winner

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Prologis benefits from its partnership with Amazon, which has a superior network of warehouses and drives demand for rental space.The company owns 1.2 billion square feet of warehouses globally and ...

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TeamjacksonIntroduction As most of my readers may know, I have a background in supply chains. My International Business Administration master's had a focus on purchasing and supply management. In addition to a number of finance courses, I spent most of my days learning about global supply chains and everything related to managing certain risks. Although I never ended up working as a supply chain manager or purchaser, I still benefit from what I learned, as supply chains are a major part of my research. Leo Nelissen - Investment FrameworkEspecially since the pandemic hit, supply chains have become more important than \"ever.\" This includes economic re-shoring, de-globalization, and so many other topics that I was able to turn into actionable ideas. With that said, on March 10, I wrote an article titled FedEx Investors: Is Amazon Eating Your Lunch?\" In that article, I discussed how Amazon (AMZN) could beat both FedEx (FDX) and UPS (UPS) in terms of daily parcel volumes, making it a major supply chain player in North America and beyond. Wall Street JournalThe key is its real estate, partially provided by Prologis (NYSE:PLD), the largest industrial REIT in the United States and a powerhouse in the warehousing industry. This company has allowed Amazon to build a network of assets that improve customer satisfaction and make it very hard (read: close to impossible) to compete with Amazon on a service level. [...] Amazon's rise to the top spot has been supported by strategic initiatives, including regionalizing its logistics network and launching a franchise program for package delivery. - FDX Article My most recent (co-produced) article on Prologis was written on October 20, when we went with the title \"All Roads Lead To Prologis: Why We Love This Industrial Juggernaut.\" Since then, shares have returned 27%, beating the 23% return of the S&P 500. In this article, I'll revisit the company and give you my take on the risk/reward from a dividend (growth) investor's point of view. So, let's get to it! What Makes Prologis So Special In 2021, Amazon spent $7.2 billion on operating leases. That number turned into $10.6 billion in 2023. This surge is no surprise, as having a superior network of warehouses allows it to better service customers. Roughly two years ago, the Commercial Observer reported that the company signed one of the biggest warehouse leases ever. Commercial ObserverThe warehouse is located in the City of Ontario in San Bernardino County. It's owned by Prologis, which was called \"Amazon's favorite landlord\" in the article. Although the article also mentioned that Amazon is increasingly looking to own its warehouses instead of renting them, it remains one of the best tenants to have and a company in need of as many high-quality partners as possible to penetrate the e-commerce industry.  Amazon accelerated its aggressive logistics expansion during the pandemic, adding tens of millions of square feet of warehouse space, buying up trucks and vans and hiring tens of thousands of workers to keep up with increased demand from homebound consumers. The company’s warehouse space jumped from 165 million square feet prepandemic to 379 million square feet by May 2022, according to data from MWPVL International Inc., a Canadian supply-chain consulting firm. - Wall Street Journal  With all of this in mind, Amazon is just one of many customers of Prologis. Going into this year, the online retailer accounted for 34 million square feet of occupied rental space. That's 6.4% of net effective rent (\"NER\"). Its top 25 customers account for 22.4% of NER. The customer list is dominated by some of the world's largest corporations operating in a wide range of industries. PrologisThe one thing all of these companies have in common is the need for an effective distribution network. In fact, Prologis is so large that it owns 1.2 billion square feet on four continents. It has roughly 6,700 customers that move $2.7 trillion in goods each year. This means that 2.8% of global GDP flows through the company's warehouses! Even better, a big part of the company's warehouse demand is driven by non-cyclical drivers, including supply chain modernization, basic daily needs, and secular changes. PrologisWhile Prologis is still prone to cyclical weakness, it benefits from a massive secular trend that requires top-tier warehouses. According to the company, we can expect demand to remain strong, with above-average net absorption through at least 2027. PrologisDuring the latest Citi 2024 Global Property CEO Conference, the company noted that the influence of e-commerce and new market entrants, mainly from Asia, are major drivers of current industry demand. According to Prologis, companies like Tmall and Shein, which are ultra-low-cost consumer companies from China, are expected to disrupt the traditional market and pressure both Amazon and Walmart (WMT). While these are major issues for retailers, it's an opportunity for real estate players like Prologis, which are in a much better spot in the supply chain. Online shopping is evolving into a more fluid process that doesn’t contain the entire transaction on one site or another. The winners will be those who carefully study the shopper journey, taking advantage of what each site offers and minimizing their cost exposure on others. - Bloomberg In light of this battle between retailers, Prologis benefits from the fact that e-commerce requires 3x more space than brick-and-mortar sales. PrologisMoreover, even from a cyclical vs. secular point-of-view, the company is seeing that supply/demand dynamics in its industry are undergoing shifts. During the aforementioned conference, the company explained that it has seen a significant decline in new building starts, which is favorable for an industry that continues to enjoy secular demand growth. Moreover, despite the slower demand observed in 2023, normalization is expected in 2024 - likely starting in the second half. This would end an uptrend in vacancies and potentially return to a vacancy downtrend. PrologisThe company ended 4Q23 with an occupancy rate of 97.6%. That's down from 98.2% in 4Q22. This year, the company is guiding for an occupancy rate of 96.5% to 97.5%, which should be a bottom number if the company is right about a demand recovery in the second half of this year. With regard to supply, the chart below shows that after the pandemic, supply exploded. However, elevated rates and inflation pressured new supply. Now, the company expects new supply growth to remain subdued. PrologisThe supply/demand situation bodes well for rent growth. Assuming the vacancy rate remains close to 5%, the company could see mid-single-digit to low-double-digit annual rent growth on a prolonged basis. I added the 5% vacancy rate to the chart below to visualize this a bit better. PrologisOn top of tailwinds like emerging e-commerce from China and secular growth from the ongoing e-commerce penetration, the company is a beneficiary from economic near/re-shoring. During the Citi conference, the company noted that while the U.S. market remains a primary focus, opportunities in Mexico are being actively explored to capitalize on the increase in manufacturing activity. As we can see below, Mexico is now a bigger trade partner to the U.S. than China. Needless to say, this includes Chinese companies investing in Mexico to avoid (potential) tariffs.   DeloitteHowever, the company is not going to give up on its core strategy, which is buying assets in markets with high entry barriers. This includes the Southern Californian infill markets, where it dominates the market with its peer Rexford Industrial Realty (REXR). As we can see below, this market is also one of the areas that provide the company with embedded growth opportunities of $40 billion! PrologisAccording to the company: [...] we own 1.2 billion square feet of the highest quality logistics buildings in the best markets around the globe in 20 countries. We also have a robust development business, $7 billion development portfolio right now with $40 billion of opportunity with embedded in our land bank. We also make money through a strategic capital vehicle with about $60-plus billion of third-party capital that generates AUM fees as well as promotes. - Citi 2024 Global Property CEO Conference So, what does this mean for shareholders? Shareholder Distributions & Valuation Because Prologis is operating so efficiently in a highly favorable real estate segment, it has been a fantastic performer on the stock market. Despite post-pandemic headwinds, the stock has returned 323% over the past ten years, crushing the 80% return of the Vanguard Real Estate ETF (VNQ). Data by YChartsThis performance includes its dividend. After hiking its dividend by 10.3% on February 22, the company currently yields 3.0%. Although a 3.0% yield may not be that exciting in an environment where Dividend Aristocrats like Realty Income (O) yield 6%, there are a few benefits that come with this yield.  The five-year dividend CAGR is 12.6%. According to Seeking Alpha, the sector median is just 0.3%. The company has strong secular growth, as we just discussed. The dividend is protected by $4.44 in expected 2024 per-share AFFO (adjusted funds from operations). This translates to a payout ratio of 87%. While that may be a bit elevated, the payout ratio is expected to drop significantly in the years ahead.  Data by YChartsAs we can see in the overview below, analysts expect 2024 per-share AFFO to bottom at $4.44. That's 2% below the 2023 result. 2025 is expected to see 19% growth, potentially followed by 10% growth in 2026. Although these numbers are subject to change, they confirm the company's own expectations of bottoming growth in 2H24. FAST GraphsThe data above also implies that PLD is attractively valued. Currently, PLD trades at a blended P/AFFO ratio of 28.6x. While this is above its long-term normalized 25.7x multiple, we get a $150 price target when we incorporate expected AFFO growth through 2026. That target is 17% above the current price. The current consensus price target is $146. Going back to the dividend, there's another reason why the dividend is attractive. In addition to an increasingly favorable coverage ratio due to elevated AFFO growth expectations and a history of strong dividend growth, the dividend is protected by a fantastic balance sheet. PLD is one of the few A-rated companies in the S&P 500. This balance sheet comes with a debt-to-adjusted EBITDA ratio of just 4.6x, $6.0 billion in liquidity, and a weighted average remaining maturity of more than nine years. PrologisThis also protects PLD against the current environment of elevated rates. All things considered, I have PLD on my \"favorite REIT\" buy list. Like its peer REXR, I'm looking to make it a holding of my portfolio this year, as I believe it's a fantastic supply chain play with a very bright future and a high likelihood of prolonged dividend growth and stock price outperformance. Takeaway Prologis stands out as a top-tier investment in the real estate market, especially for those seeking stable dividends and long-term growth. With its massive portfolio of high-quality warehouses, Prologis is well-positioned to capitalize on the booming e-commerce sector and related secular growth trends. Despite cyclical volatility, the company's strong fundamentals, including robust occupancy rates and prudent financial management, give me confidence to believe that it remains in a good spot. As Prologis continues to expand its footprint, I believe the company is in a good position to generate elevated returns for its investors on a long-term basis. Pros & Cons Pros:   Resilient Growth: Prologis has a track record of elevated growth, fueled by what seems to be an unstoppable force in e-commerce.  Stable Income: With a solid dividend yield and a history of strong dividend growth, PLD offers investors a reliable source of income.  Strategic Positioning: Its strategic positioning in high-demand markets and its extensive portfolio make it a standout choice for long-term investors.  Strong Balance Sheet: PLD has a top-tier, A-rated balance sheet.   Cons:   Moderate Yield: While PLD's dividend is impressive, it may not be high enough for income-focused REIT investors.  Stock Price Volatility: The stock is subject to both economic and market risks.  Dependency on E-commerce: While e-commerce growth is enjoying secular growth, elevated economic headwinds could cause the company to encounter weaker growth.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422547577"}