Prologis sees exceptional growth potential ahead
Hardly any major landlord in the world — and none I know in the GCC — can boast 22 per cent rental growth in their property portfolio. Yet this is exactly what happened at Prologis, the world’s preeminent industrial property and logistics Reit whose financial charms I have waxed elopement in the past decade. Prologis is the world’s largest global industrial Reit with 690 million square feet of warehouse space in the US, Europe and Asia. Ironically, Prologis will continue its rental growth momentum as rents on their properties continue to rise, given the sheer scale of e-commerce demand and the existing US warehouse supply deficit. Even without no raise in the occupancy ratio, I expect its stellar growth in net operating income to continue in 2018, possibly at least 100 basis points above management guidance of 4.5 per cent. Other than rent increases, the other engine of Prologis revenue growth is at least $1.8-2 billion in project development.
With low vacancy, rental increases, global leasing it projects and a massive development pipeline, is mathematically impossible for Prologis’s net operating margins not to rise in 2018 — Prologis, is building giant multi-storey warehouses in the US, starting in Seattle and San Francisco, leveraging its past construction of such mega-warehouses in China and Southeast Asia. Since land is so expensive in both Seattle and the Bay Areas, these 600,000 square foot logistics monsters will have almost zero vacancy rates and command exceptional pricing power.
There is a chronic lack of warehouse space in both Los Angeles/ Long Beach and the East Coast. All existing Prologis warehouses in southern California and New York have 99 per cent occupancy ratio, making this the world’s most attractive, liquid, industrial property landlord for me. Other than data centers and medical labs, industrial REIT’s are the finest property investments I know in the US, London and Singapore. Industrial real estate in prime global cities in an asset class niche where supply has consistently lagged demand since the 2008 financial crisis.
Prologis offers exceptional growth potential in the decade ahead. E-commerce is a mere 15 per cent of the current portfolio but no less than one-third of its 50 mil- lion plus square feet devel- opment project pipeline. Industrial economists at Stanford have estimated that e-commerce alone will necessitate 340 million square feet of warehouse construction in the next three years. This is my ultimate rationale why Prologis is a must own growth asset for any sophisticated industrial property investor, with its cash on cash portfolio yield of 6.4 per cent.
It is also true that e-commerce requires three times the warehouse space of traditional retailing or shopping mall, a business with as much growth potential as black and white television. We are seeing nothing less than a revolution in the logistics of distribution and freight transportation in the world’s most attractive megacities. Prologis owns five times more warehouses than its closest peer, making it a de facto dominant oligopolistic in one of the world’s most attractive, fastest growing and difficult to replicate property market niches. I would not be surprised if its acquisitions agenda does not include Liberty now that it has existed the medical office space.
Prologis’s global scale enables it to handle $1.3 trillion in goods flowing through logistics networks. Since 60 per cent of the US population lives within 100 miles of a Prologis building, it is the ideal distribution center for e-commerce. It is no coincidence that Amazon is Prologis’s largest client and occupies 16 million square feet of warehouse space. Prologis is the Warehouse King of Wall Street.
Prologis is not inexpensive at 20 times estimated funds from operations. Its dividend yields is 3 per cent, a pittance to the 7-8 per cent div yields I would get in Singapore industrial Reit’s a decade ago. Yet it deserves its valuation premium. It has pricing power, a technological moat, the ultimate global industrial development platform and economies of scale none of its peers can hope to replicate. I expect hundreds of billions of dollars to exit shopping mall/retailing shares in the next three years. They will be rotated to industrial Reit’s. Rental growth will work its magic at lease expiration. Its stellar balance sheet will enable it to leverage the global growth of e-commerce. Adjusted funds from operations (AFFO) growth can well accelerate to 8 per cent. Of course, industrial real estate is hugely correlated with economic growth so a global recession would be fatal for Prologis shares. I recommend a 5456 new money entry level for a 70 target.