When investors buy real estate investment trusts (REITs), they aren’t just buying real estate companies. They also are buying the tenants that comprise the REITs leasing portfolio.
Before you decide to buy any REIT, consider the stability and solvency of its tenant base. Consider these questions: Are any tenants facing bankruptcy or closing a large number of locations? Are the tenants high quality? Are the tenants diversified, not only geographically but also by industry? And finally, what is the percentage of each tenant’s annual base rent (ABR) in the total tenant portfolio?
Take a look at one well-known retail REIT and consider the questions raised above in evaluating its merits.
Prologis Inc. PLD is a San Francisco-based industrial REIT that owners and manages approximately 1.2 billion square feet in just under 5,500 industrial logistics properties throughout the U.S. and 18 other countries. Founded in 1983, the company has long been a leader in appreciation among REIT stocks.
In addition to leasing space through a program known as the Essentials Platform, Prologis supplies equipment, robotics and other services to its customers to enhance business operations.
Prologis is the largest REIT by market capitalization, with a cap rate of $13.02 billion and has been a stalwart among REITs for the last 25 years. During that time, it has a total return of 571.39% for those taking dividends and 1,282.25% for investors who reinvest the dividends. Its 2023 year-to-date total return is 11.01%.
Through the years, Prologis has been known as a growth-oriented REIT rather than for having a high-yielding dividend. But over the past five years, Prologis has increased its quarterly dividend by 81.25% from $0.48 to $0.87 per share. The $3.48 annual dividend yields 2.84%.
One of Prologis’s strengths is the diversity of its portfolio in geographical location, types of goods, industries and the percentage of ABR per tenant. The chart below shows the top 10 tenants as well as the diversification of goods in Prologis’s buildings:
You can also see the geographic diversity of its portfolio net operating income (NOI) from the chart below:
Geographic diversity reduces risks Prologis would develop should any one area of the world fall into recession. But because 86% of Prologis’s NOI comes from the U.S., it remains its most important geographic region by far.
Prologis gets high marks for its stable-to-increasing occupancy rates and customer retention over the past year, but despite its first-quarter 2023 occupancy rate of 98%, there was a slight drop in the rate from the fourth quarter of 2022 and a more troubling 5.2% drop in customer retention.
Whether this is the beginning of a downward trend in occupancy and retention or just a one-quarter anomaly remains to be seen. From the chart below, it’s noteworthy that the occupancy and retention rates are higher than they were in the first quarter of 2022 and that its occupancy rates throughout the rest of the world are stable and in the mid- to upper-90th percentile.
Below is a chart showing the geographic breakdown of each area of the U.S. and other countries by square feet, occupancy and leased percentage. One minor concern is the percentage of total square feet being leased in the three large metropolitan areas of Southern California, New Jersey/New York City and Chicago.
Together, these areas make up over 26% of Prologis’s total square footage in the U.S. But because the demand for industrial space in large urban areas is far greater at the present time than it is for office space, this may not be a problem going forward.
Prologis’ top customers are some of the largest and most well-known companies in the world. The list includes Amazon.com Inc. AMZN, Home Depot Inc. HD, FedEx Corp. FDX, United Parcel Service Inc. UPS and Walmart Inc. WMT. This means consistency and stability when it comes to rent collections.
One recent concern is that Amazon currently leases 5.2% of Prologis’s total square feet. Between 2020 to 2021, Amazon purchased over $450 million in industrial space and land with the intent to downsize the amount of space that it leases from Prologis and other industrial REITs.
During Prologis’ second-quarter 2022 conference call, the executives were asked about Amazon’s announcement that it would be unloading a great deal of leased space because of overcapacity. Prologis responded that it was 99% occupied in areas where Amazon was leasing space and that existing rents were 54% below market, so finding new tenants would not be difficult should Amazon terminate its leases.
Keep in mind that Amazon was renting about 33.4 million square feet from Prologis. While finding new tenants could be easy, there is often significant expense and lost revenue from the time a large tenant leaves until a new tenant moves in. New buildouts, carrying costs and rent incentives could significantly impact Prologis’ bottom line.
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Tenant Profiles
In addition to Amazon, other large tenants in Prologis’ portfolio include:
Home Depot Inc. is Prologis’ second-largest tenant with 1.7% of its ABR. Home Depot is the largest home improvement retailer in the U.S. and one of the most successful companies in America over the 45 years since its inception. Going back to 1995, it has an average annual total return of 13.8%. Home Depot has an A/A2 rating by S&P/Moody’s. Amazon and Walmart, two other top 10 tenants in Prologis’ portfolio, also have very high ratings.
FedEx is a Memphis, Tennessee-based multinational company that provides logistic services such as deliveries, shipping, transportation, e-commerce and business solutions. It was founded in 1971 by Frederick W. Smith as an overnight courier service but has expanded its services greatly since then. It had its initial public offering (IPO) in December 1978. Deutsch bank recently maintained a Buy rating on FedEx shares and raised its price target from $240 to $282 per share.
FedEx comprises 1.4% of the total square footage of Prologis’s leases.
Walmart is a Bentonville, Arkansas-based American multinational retail corporation. Walmart operates a large chain of hypermarkets (combined department store and grocery supermarket), discount department stores and stand-alone grocery stores worldwide. It has over 10,500 stores and Sam’s Clubs across 24 different countries and employs 1.6 million people in the U.S.
Walmart stores also offer several services, such as auto care centers, financial and photo services and pharmacies. Its Walmart Plus program provides users with discounts on streaming services, free shipping, free delivery, early access to online deals and product releases and savings on gasoline.
Walmart was founded in 1962 by Sam and James Walton. Its IPO at $16.50 per share was in August 1972. Today, its annual revenue of $570 billion makes it the largest company by revenue in the world. Of Prologis’ total square footage, 0.6% is leased to Walmart.
Recent news
On April 18, Prologis announced its first-quarter operating results. Funds from operations of $1.22 were in line with analysts’ estimates, but revenue of $1.77 billion beat Wall Street’s view by $120 million and was 45.1% higher than revenue in the first quarter of 2022. Prologis also slightly raised its full-year 2023 guidance, from a range of $5.40-$5.50 to $5.42 to $5.50. The consensus is for $5.50.
During the conference call, Prologis Co-Founder and CEO Hamid R. Moghadam said, “Demand remains healthy, despite some moderating in terms of decision-making. Given the macro environment, we continue to operate our business with a degree of caution. We foresee any potential impact on demand as likely to overlap with a deceleration in new deliveries, sustaining momentum with favorable conditions for high occupancy and continued rent growth into 2024.”
As for analysts, most of them tend to be bullish on Prologis. On April 19, UBS analyst Brent Dilts maintained a Buy position on Prologis and raised his price target to $144. On May 3, RBC Capital Markets analyst Michael Carroll maintained an Outperform rating on Prologis and raised the price target from $144 to $148.
Year to date, Prologis has had a total return of 10.2%, making it the second-best industrial REIT performer behind Plymouth Industrial REIT Inc. PLYM and in the top 5% among all REITs.
Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.
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