Prologis, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Prologis, Inc. is a real estate investment trust (REIT) that primarily invests in logistics properties, such as warehouses and distribution centers, in various markets globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Prologis operates a global real estate business with a primary focus on logistics facilities, a segment that facilitates the movement of goods in the supply chain. The company develops, acquires, and manages high-quality logistics properties, leasing them to diverse customers involved in warehousing, transportation, and manufacturing.

Revenue Distribution

Prologis derives revenue primarily from lease contracts on its portfolio of logistics properties. These leases tend to be long-term contracts. It also earns some revenues from ancillary management fees, property management and development services. Geographically, revenues are diversified with strong presence in the United States, Europe, Mexico, and parts of Asia.

Recent Revenue and NOI (Net Operating Income) Trends

Strong Growth: Prologis continues to experience revenue growth, with Q3 2024 net earnings of $0.89 per share, representing an increase of about 12% over the prior year. This growth indicates positive momentum in their business and the growing demand for logistics space.
Solid Core FFO: Core funds from operations (FFO) came in at $1.34 per share in Q3 2024, or a 7.1% growth year over year. This signifies that the core underlying profit that is generated by Prologis’ properties is growing at a steady pace.
Strong occupancy rate: Prologis has shown a strong occupancy rate of 97.3%. This shows an impressive occupancy rate of their properties and that demand for their logistics facilities is very strong. It is a sign of low vacancies in their portfolio.
Growth Outlook: Prologis management continues to highlight a strong growth outlook, citing favorable demand from customers across their operating portfolio and opportunities for new acquisitions.

Industry Trends

The demand for logistics properties is linked to the expansion of global supply chains. The rise of e-commerce has significantly driven demand for warehousing and distribution facilities, as well as companies looking to reshore production and increase buffer stock inventory. The pandemic has only accelerated those trends.
On the supply side, construction costs and land prices have created some constraints on new developments, leading to higher values for existing properties. A recent reduction in supply is also leading to new leases increasing in price, and increased NOI from existing facilities.
E-commerce growth is expected to remain strong and push for further development of logistics hubs near population centers. With the rapid growth of e-commerce, more and more people are moving towards online shopping, and that drives the need for last-mile delivery, which in turn requires a different kind of real estate.
In the long run, most logistics will go to automation, which requires taller buildings. So, the most optimal size and structure of facilities will change dramatically in the future.
The importance of supply chain security has further increased the demand for domestic manufacturing capabilities.

Margins

Operating Margins: Prologis has decent operating margins because their business model is highly recurring and has high barriers of entry. It is hard to compete with the location advantage and the strong network that they possess. The operating margins are very strong and stable at almost 60% for most of the years.
Net Income: The net income of Prologis has been growing over the past years, however it has also fluctuated a lot, from 3.88B in 2019 to 1.14B in 2021, then up to 2.4B in 2022 and is 1.67B this year for the first three quarters (extrapolated annual value of 2.23B), This means the company can be affected by accounting and macro conditions.
Core FFO: Core FFO is more stable than net earnings, showing a consistent up trend over the years.
Pricing Power: Because of their location, Prologis generally has decent pricing power and has a history of increasing rent during renewals. This can be a strong moat, provided they dont over leverage their facilities.

Competitive Landscape

The logistics real estate market is rather fragmented, and is not just limited to publicly traded REITs, private players, and partnerships all compete, with different business strategies.
Prologis stands out in terms of global footprint and scale, as the largest owner of logistics facilities across the globe. The only other competitor with a similar reach would be a competitor, but this market is incredibly fractured.
Competitors include firms such as Duke Realty (which was acquired by Prologis) and other industrial REITs like AMB and GID. There is also a wide variety of private firms and partnerships. Many smaller players have specific local coverage.
Competition happens mainly at the local level. Even though national players have great competitive advantages, at a regional level they compete with smaller and local players.
New firms are unlikely to enter the market and challenge the dominance of the leaders because of very high barriers of entry.
The rising trend of e-commerce will create even more demand for logistics real estate.

What Makes Prologis Different?

Scale and Global Presence: As the largest owner of logistics facilities globally, Prologis benefits from economies of scale, which translate into better profitability. Their diverse portfolio geographically also allows diversification of risks in different geographical zones and gives them a competitive advantage in the locations they have a presence. This is a huge advantage over most competitors, because if there is disruption in one part of the world, another part might benefit. They also have vast amounts of information on their properties, and the knowledge accumulated from that, is a valuable intangible asset.
Strategic Partnerships: Prologis’s strategic partnerships with global brands, large transportation companies and major manufacturers gives them an advantage when building new properties, and a steady demand for properties.
Technology Integration: Prologis is one of the pioneers in using data analytics and real time data collection for their properties to optimize operating costs, reduce turnover, and improve customer relations.

Financials in Detail

Balance Sheet: Prologis has a fairly strong balance sheet, even though it has a huge debt load, most of their debts are long term with fixed rates, that reduces their risks of refinancing. Also, they have decent liquidity to take advantage of new acquisitions. It is also worth noting that they have reduced debt over the past year.
Current Ratio: The current ratio has fluctuated over the past few years but remains at a healthy average of 1.8, signaling the company’s capability to handle short-term liabilities with ease.
Debt-to-Assets ratio: Debt-to-assets has also fluctuated a bit, from a high of 0.6 to a low of 0.4 and has returned to above 0.5 currently. For comparison purposes, REITs typically have a debt-to-assets ratio at or around 0.5.
Cash Flow: Cash flow from operating activities was roughly $1.9 billion for the nine months of 2024, which translates to an annual cash flow of $2.5B for the year, showing good cash generation capability, which helps to service their debts and acquire more properties.
Credit Ratings: Their debt is rated at BBB+, which is on the low end of investment grade. A downgrade on credit ratings will definitely impact the cost of borrowing and would decrease profitability.

Legitimate Risks to the Moat and Business Resilience

Rising Interest Rates: Prologis is vulnerable to changes in interest rates. While most of their debt is long term with fixed rate, increase in interest rates will cause a sharp decline in the value of their existing properties and also reduce the profitability of new development projects. Their cost of borrowing might also go up, which would decrease future profitability.
Economic Downturn: If the world economy experiences a sharp downturn, demand for logistics properties would drop, potentially creating oversupply and an increase in vacancies. A drop in business activity will also lower their revenues. A lower ability to generate cash, and higher interest rates will combine to a major negative impact to their operations.
Technological Obsolescence: While they have a focus on technology, it is still a risk that disruptive changes in technology and logistics can render the existing properties obsolete or less valuable. The development of drone delivery or robotic handling might impact the demand for logistics facilities that the company currently has.
Tenant Concentration: High concentration in just a few industries exposes them to industry-specific downturns. Their top tenants are a mix of e-commerce, retail, and logistics companies, they do not seem to be tied to one specific industry, but any downturn in e-commerce, for example, would hurt their profits.
Increased competition: As other REITs and private funds attempt to consolidate or expand their portfolio in the logistics field, competition for new acquisitions will likely rise. That might pressure the management to purchase expensive properties that might erode their high profit margins. The industry is currently somewhat fragmented but is consolidating fast, it is not clear what their competitive environment will be in the future.
Regulatory Changes: Changes in government regulations related to supply chain, trade policy, or construction could negatively impact the firm’s operations. Government policies can create new regulations, which can affect their operations. As an international company, different regulations from different countries would mean increased operational complexity and cost.

Understandability: 2/5

Prologis’s business model can be understood on a surface level, however, a deep dive into their competitive advantage, financial metrics, and the complexities of operating in different geographies is complicated. Furthermore, REITs in general operate in complex ways from the financial perspective, which makes it even harder for new investors to understand.

Balance Sheet Health: 4/5 Their balance sheet is overall very strong, but a few concerns are on their very large debt levels (even though it is mostly long-term fixed rate), and the fact that they are vulnerable to market wide factors that would greatly impact their ability to operate in the future. Their cash generation is excellent and provides excellent resources to navigate those uncertain times.