What's Next for the World's Largest REIT
Prologis Investor Forum Shows the Future of Industrial
Prologis Inc. is the world's largest REIT ($122 billion market cap) with over 1.2 billion of industrial square footage spread across four continents and 20 countries. How they think about the future is a major signal, not just for industrial real estate, but for the REIT sector generally.
Here are our 3 big take-aways from Wednesday's Investor Forum:
1. Drawn to Data Centers
Even Prologis can't resist this hot dot of growth. Prologis' competitive advantage in the data center business is converting existing logistics facilities versus developing from the ground up. The yield on capital deployed in conversion is 9-10%, nearly double that of logistics development. COO Carter Andrus,
"Over the next 5 years, we think that there's 20 sites between buildings and land that can be converted to data centers that will provide an additional 3 gigawatt of power and $7 billion to $8 billion additional investment, mostly being powered shell and some of it being turnkey development. We're not looking to be a data center operator...What we're trying to do is just take advantage of key conversion opportunities within our portfolio."
2. Scale Matters
Prologis' massive size helps drive operational efficiencies. Prologis is finding savings throughout the value chain, everything from optimized procurement to creating geographic "clusters" of facilities. Prologis defines a cluster as 20 or more Prologis facilities within a 5-mile radius. These initiatives have driven General & Administrative expenses as a percent of asset value to a sector low 35 basis points, not only better than their industrial REIT competition, but significantly better than other "blue chip" REITs. CIO, Joseph Ghazal,
"What we've built is a super integrated platform that absolutely drives better customer experience and more value to our shareholders. And when you take our scale with the super integrated platform, this is what drives operating outperformance. We see that showing up with industry-leading operational efficiency, reduced capital and operating expenses at our properties, and we're able to maximize revenue."
3. Energy As a Moat
Whether it's the substantial power needed for data centers, electric vehicle charging or just helping tenants meet their emissions targets, Prologis sees a viable business in being a provider of renewable energy solutions. What is different about Prologis is they are not making overtures at sustainability simply to meet ESG demands. They are presenting it to investors as a future value-driver, putting this business under the header Prologis "Essentials." Global Head of Mobility, Hendrik Holland,
"We invested in the infrastructure and we sell our customers the use of that infrastructure as a service so they get the energy they need for the duration of a lease term. Now in essence, this is no different from how we make money in real estate. We're investing in a capital asset, and we're charging our customers for the use of that asset over the lease term. The returns that we're generating by investing in these charging assets is in the range of 12% to 14% on an unlevered IRR project basis."
Prologis' investor day demonstrates how, at a certain size, even REITs need to innovate to drive growth. Prologis is starting new operating businesses within their real estate business to drive operational efficiency, rent growth and tenant retention. These new business lines arguably build a moat around what is already a substantial competitive advantage from Prologis' massive real estate portfolio.
Time will tell if the market gives Prologis credit for these innovations or views them as unneeded complexity for the world's largest owner of logistics real estate.
>> All slides screenshots are from Prologis Investor Relations Page. Full Decks Can Be Found Here
Quote Book
Jerome Powell, Chairman of the Federal Reserve
Early Christman Present 🎅
“We’re aware of the risk that we would hang on too long...We’re very focused on not making that mistake.”
- Jerome Powell, Federal Reserve Chair (WSJ)
Confirmation of Multifamily Loan Woes... 😥
“What [Block] found, it lines up with what we’re seeing in the deals we’ve looked at,”
- Brian Underdahl, Nuvo Capital Partners (The Real Deal)
...But still a tough trade👏
"Short sellers seem a little late. U.S. mortgage REITs have lost almost a third of their value on average since the Fed began raising rates in March 2022, so a lot of bad news is already priced in. And like other real-estate stocks, both Blackstone Mortgage Trust and Arbor Realty Trust have risen over the past month as investors grow confident that interest rates have peaked.”
- Carol Ryan, WSJ (WSJ)