Key Takeaways: Ahead of our upcoming launch on industrial REITs in early-July, we are doing a quick recap of important takeaways from what we thought was one of the more interesting and informative presentations from PLD at this week's NAREIT conference. We will have more notes to follow on other names this weekend:
Prologis (PLD):
- ~2.5% of global GDP is touching the PLD system annually on a USD-denominated basis - strategic capital (third-party fund) business with its international focus allows PLD to (1) manage equity risk exposure, (2) source attractively-priced global capital, and (3) benefit from a wealth of customer data for analytics purposes. We would argue that the fee streams and corresponding opex / G&A should be value separately at a global asset manager-type multiple (possibly a premium one at that), versus traditional wholly-owned NOI and PLD's share of NOI generated from partially owned assets
- Current land bank should support ~$17 billion of future development, a portion of which will be delivered on-balance sheet and then "sold" into the strategic capital business to (1) generate recurring asset management / property management / leasing fees for strategic capital and (2) recycle PLD's capital for redeployment - virtuous cycle long-term
- Global in-place mark-to-market is about ~13.6% and rising - forward indicator points to sustained mid-single-digit NOI growth - represents ~$660 million of incremental NOI over time. Currently ~16% in the U.S. where PLD owns primarily on-balance sheet and, by extension, has the most equity exposure
- Inflation in land and steel prices, more difficult and costly entitlement processes and NIMBY issues are making it incrementally more difficult (it already was hard) to position new logistics facilities closer into the customer in gateway urban areas - raising the irreplaceability of existing portfolios as critical infrastructure
- In-place rents are running at just ~3-4% of total customer supply chain costs, and even more interestingly at roughly ~25-50bps of customer sales versus a traditional retailer at 8-10% of sales or higher. The team is constantly doing big data work on customer "willingness to pay" given reorientation of distribution and sales channels away from traditional brick-and-mortar
- Conclusion: It is not unreasonable to expect sustained +4-5% SSNOI growth, given that rental rate growth is accelerating and has plenty of upside from current levels. We expect the imbedded mark-to-market to move higher by year-end 2021. The questions for the stock and sector that we need to sort out by July are (1) potential rate-of-change deceleration (victim of own success) and (2) Quad 4 positioning. More to come...
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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