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.