Logistics real estate riding on the e-commerce boom
Prologis is a US listed industrial real estate investment trust (REIT) that owns land used for warehousing and distribution in and around major cities, mostly in the US.
For those familiar with Goodman Group in the Australian market, Prologis is similar – but while Goodman Group manages and develops a property portfolio largely on behalf of its clients, Prologis owns its properties outright and generates earnings predominately as a landlord receiving rents from clients.
Warehouses may sound old world and boring, but prime urban logistics sites are in hot demand from the e- commerce sector. Timely fulfilment (in many instances same or next day) of online orders requires proximity of warehousing to customers. Amazon is Prologis’ largest single customer at close to 5% of its customer rents.
Rising e-commerce penetration has been a long-term theme, and US e-commerce sales have grown at a 15.2% compounded annual growth rate over the past decade versus 4.2% for total retail sales. This has been accelerated by Covid, and e-commerce currently represents over 20% of sales in the US. It is also notable that e-commerce requires 3 times the warehouse space versus warehousing for traditional bricks and mortar retailing. This is due to the requirement to have stock on hand for rapid fulfilment and handling of single goods rather than bulk wholesale. Further, rents are only approximately 5% of total supply chain cost (with costs mostly comprising of transport and labour).
On the supply side, there is a scarcity of existing sites relative to demand, and there is a long and difficult zoning approval process required to create new industrial properties.
In terms of how this has translated to the operating environment for Prologis, they reported occupancy had risen to 97.4% in the 4th quarter of 2021, and the US industrial REIT market rents grew at 18% to 20% in 2021.
Another positive theme for the sector is that the Covid experience has meant that retailers will seek to hold high inventory levels relative to history, to ensure resilience from potential supply chain shocks.
We believe the positive themes and tailwinds for the company are structural and enduring. More near term, while same store cash net operating income grew at 7.5% in 2021, this is guided to continue at 6 to 7% for the 2022 financial year.
Prologis has been a standout “Covid winner” in terms of share price performance, with a total return since the start of 2020 of 24% p.a. Although valuation metrics became more stretched by late 2021, and while the stock has sold-off -16.4% so far in 2022, we see the present environment as potentially representing a more interesting entry point. We believe Prologis exhibits pricing power, which is a positive in an inflationary environment, and the stock has a bright future riding on the coat tails of the e-commerce trend.