REITs have been on a buying spree, making $67.8 billion of net acquisitions in 2021. Several factors have contributed to these purchases, including a robust recovery in underlying property markets and solid outlook for future growth, a low cost of capital, and strong balance sheets that are in a good position to support this expansion of their real estate portfolios. And while the war in Ukraine has injected new risks and uncertainties into the outlook, the factors that supported REIT acquisitions last year leave them well-prepared for the path ahead. (Full disclosure, I am Senior Economist and SVP Research Analysis at Nareit, the worldwide representative voice for REITs and listed real estate.)
REIT net property purchases rose steadily through the year last year.
As publicly listed companies, REITs often issue common stock to raise capital to fund their acquisitions. High and rising share prices decrease REITs’ cost of capital, and also generally signal market confidence in the future prospects for income-producing real estate. The 41.3% total stock market return by REITs in 2021 provided both a strong signal to expand and also low-cost access to the capital required to do so. Indeed, REITs raised a record $126.9 billion in 2021 through issuance of common equity, preferred equity, and unsecured debt.
REIT acquisition activity increased steadily through the year, to $26.7 billion in the fourth quarter. Activity was broad-based, with nine of the 12 property sectors having positive net purchase activity, according to the Nareit T-Tracker®. Self storage REITs and residential REITs led the way, with $7.0 billion and $6.2 billion net purchases, respectively. These property sectors have been red-hot during the pandemic. Other sectors with significant net acquisitions include retail REITs and health care REITs, with $5.5 billion and $2.8 billion, respectively. These sectors came under pressure in the early phases of the pandemic, causing disruptions that led to opportunities for repositioning and consolidation.
Self storage, Residential, Retail, Health care and Industrial REITs had major purchases
Nine of the 12 REIT property sectors bought properties, on net
These acquisitions come at a time when REIT operating performance and financial performance are both on the upswing. Occupancy rates of all properties held by REITs rose to 92.3%, an increase of 325 basis points from the low point reached early in the pandemic, and have nearly returned to their levels preceding the pandemic. Across property sectors, occupancy has risen among the apartment, industrial, and retail REIT sectors, while occupancy rates have continued to decline in the office sector.
Occupancy rates reached bottom in mid-2020, but since then have risen for most sectors
Occupancy rates of REIT-owned properties are up 325 basis points from pandemic lows
Financial performance has benefited as conditions in property markets have firmed and occupancy recovers. Indeed, after having declined in 2020, earnings of the REIT sector (as measured by funds from operations (FFO)) rose 24.6% in 2021 to a record high of $64.8 billion.
REITs have strengthened their balance sheets over the past decade, reducing their leverage and locking in low interest rates for well into the future. This solid financial position has not only facilitated the recent wave of acquisitions, but has also reduced exposures to possible increases in interest rates or other shocks in financial markets in the months and years ahead.
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Despite being the largest industrial REIT and largest REIT by market cap, Prologis still has room to grow.
Long-term demand and shortage of inventory will help it grow in the coming years.
Rumors about a potential bid to acquire Blackstone's European last-mile operations could help grow its portfolio in 2022.
The largest REIT by market capitalization has big plans underway that could supercharge its growth.
Prologis ( PLD -1.39% ) started in 1994 as a smaller real estate investment trust (REIT) focused primarily on community shopping centers. With close to three decades of acquisitions and strategic moves into industrial real estate, Prologis now holds the title of being the largest REIT by market capitalization and the largest industrial real estate owner in the world, having ownership and interest in 1 billion square feet of industrial space in 4,735 properties across 19 countries.
Given Prologis' behemoth size, some investors are unsure as to whether or not it can continue to grow. After all, being the largest in this space does mean the company risks reaching a point of market saturation, where growth is no longer easily obtained. But there are several reasons to believe that simply isn't the case with Prologis. Here's why it could get much, much bigger in 2022.
Major deal on the horizon
In late March 2022, rumors started to spread about a potential $23 billion bid for Prologis to acquire Mileway, a last-mile industrial operator in the European Union owned by Blackstone Group ( BX -2.97% ). Blackstone publicly announced its intention to recapitalize Mileway in late February 2022, during a "go-shop" period that will last up to 75 days and allow multiple bidders to shop for the acquisition of Mileway.
Acquisitions like this have become a popular way for the company to grow. Prologis completed the acquisition of DC Industrial Trust in 2018 for $8.5 billion, then Industrial Property Trust in January 2020 for $4 billion, and later, Liberty Property Trust in February 2020 for $13 billion. The deal with Blackstone would be the largest private acquisition ever and would require Prologis to raise capital for the acquisition, given it has roughly $15.5 billion available for investments.
While representatives from both parties have declined to comment, this move would notably add to Prologis' portfolio in the EU and make the company a heck of a lot bigger. Mileway's portfolio consists of roughly 14.7 million square meters of industrial space, which equates to roughly 158 million square feet of industrial space, in 1,700 properties across 10 countries in the EU.
There's more than one way to grow
Prologis has also recently announced its plan to further expand its existing presence in the U.S. market, adding nearly 40% to its footprint in Portland, Oregon. Expansion projects and acquisitions are key factors in portfolio growth, but expanding its footprint isn't the only thing the company is relying on to grow its revenues.
Demand for industrial space due to limited supply has driven global rents up 15.4% year over year for the full year of 2021. The U.S. markets have seen rents increase an average of 17.4% in the last year. This has translated into a nice boost in revenues from Prologis while achieving historically low vacancy rates. High demand and low supply driving increased rental growth are a trend Prologis expects to see maintained in 2022. However, first-quarter 2022 earnings, which will be shared on April 19, 2022, will provide more insight into the growth it achieved at the start of the year.
Long-term demand drivers, including supply chain issues and continued growth of e-commerce, should mean industrial building demand isn't faltering anytime soon. Prologis is in a strong position for future growth. Right now, shares are trading at roughly 40 times its funds from operations (FFO), meaning it is richly valued.
Its premium pricing isn't a huge surprise, given its title of being the largest and leading industrial operator across the globe, and also its reliability as a company. It's maintained consistent growth and paid reliable dividend payments. It recently raised its dividend payout by 25% and certainly has room to grow. There are several other worthwhile industrial REITs to invest in that aren't trading at such a high premium, but investors shouldn't underestimate the benefit of having exposure to the largest -- and one of the best -- operators in the industry.