This real estate investment trust has crushed the S&P 500 index in the past decade.
Commercial real estate can be a particularly lucrative industry. It has created scores of millionaires and billionaires over the years. That’s because while the demand for commercial real estate is rising over time, the amount of commercial real estate available is not growing in abundance.
This factor helps to explain how a $10,000 investment made 10 years ago in industrial real estate investment trust (REIT) Prologis (PLD -2.88%) would now be worth $43,000 with dividends reinvested. Put into perspective, that is far more than the $32,000 the S&P 500 would have achieved, with dividends reinvested, over this same time frame.
Demand for industrial real estate is white-hot
Prologis is the undisputed leader of the industrial real estate market. The company leases approximately 5,500 of the highest quality industrial-type properties to its customers throughout 19 countries on four continents. Prologis’ tremendous portfolio of properties supports its massive $118 billion market capitalization.
In the last decade or so, the company has grown significantly. Prologis has steadily completed acquisitions and constructed new properties to support the growing demand for industrial properties. This resulted in the square footage of its portfolio more than doubling from 554 million square feet at the end of 2012 to 1.2 billion square feet by the end of 2022. Paired with growth in its rental rates, this explains how the company’s core funds from operations (FFO) per share nearly tripled from $1.74 in 2012 to $5.16 in 2022.
Growth appears poised to keep up as well due to the short supply of industrial real estate. Prologis estimates that its current true months of supply (TMOS) in the U.S. is 30 months. That is below the historical average TMOS of 36 months in its 31 U.S. markets. For context, a TMOS below 50 months translates into rent growth after considering inflation (e.g., real rent growth).
As it renews expiring leases at higher rates, the company is confident that its same-store net operating income will grow by 8% to 10% annually over the next several years. This should help Prologis’ core FFO per share grow at a similarly strong rate during that time, which is a healthy clip for a company of its size and scale.
Robust dividend growth can persist
The bonus for Prologis shareholders is that the company doesn’t just promise to deliver solid growth in the years to come. The stock also sports a 2.8% dividend yield, which is much higher than the S&P 500 index’s 1.6% payout.
That’s not all the company has to offer, either. Prologis’ dividend payout ratio is positioned to clock in at less than 64% in 2023. This allows the company to keep the capital necessary to expand its operations and strengthen its balance sheet. That is why it’s probably not unreasonable to expect more dividend increases within the realm of its most recent 11.5% boost over the foreseeable future.
A wonderful company at a fair valuation
Unsurprisingly, the market has caught on to the potential of Prologis in 2023. Shares of the stock are up 14% so far this year. Yet, the stock began this year so undervalued that I would argue it is still valued within reason. Prologis’ ratio of stock price to expected core FFO per share of 23.4 is hardly an expensive valuation for a company whose underlying fundamentals could be the strongest in its corporate history. Thus, the stock is still a buy for investors seeking a mix of capital appreciation and income growth.