This week we look at two more REIT’s, this time both US based. The first is a global footprint of industrial and logistics facilities, Prologis (PLD.NYSE), while the second focuses on self storage, Public Storage (PSA.NYSE).
Prologis is one way for investors to gain access to a global footprint of industrial and logistics facilities with a focus on the consumption side of the equation (much like VGP from last week, it increasingly focuses on last-mile delivery). It is to date the largest industrial real estate company in the world, operating 995m square feet and $169bn USD under management. So, why Prologis? First, to give a little context, any portfolio that targets REIT’s and doesn’t have an allocation to this company would be similar to allocating to Australian Financial Services without an allocation towards CBA.
Importantly, despite its valuation premium (i.e. it now trades at a price approximately 30% above its pre-covid high or a P/E of 62x), we feel that management has demonstrated a consistent and enviable track record in not only creating value but also the ability to adapt with changing environments. Starting off in the early 80s with a $50,000 USD line of credit, the team has survived and expanded through market cycles, initially buying retail and commercial property to now becoming the largest industrial and logistics focused real estate company in the world. The geographic footprint now includes North America, Latin America, Europe and, importantly, a fast growing Asian market. As with any stock, we like value-add created in adjacent categories and PLD continues to deliver services through its workforce solutions (i.e. logistics training and recruitment) in addition to a ventures division. Their strategy has paid off to date, annualising an Internal Rate of Return (IRR) of 20% over the past 19 years.
Returning once again to the idea of a reflation trade, there are three components of the balance sheet that are attractive from an investment perspective:
On the first point, this is an attractive way to get exposure to a secular growth story without paying the same multiples (i.e. Amazon multiples). The second, the geographic diversification ensures substantial exposure to higher growth markets, with Asia being on par with the US in nominal value. Finally on the third point, the vast majority of their debt (59%) is Euro and Yen denominated two economic blocs that are likely to be laggards in rate normalisation compared to the US.
With that context, let’s quickly run through the numbers. Revenue on a TTM (Trailing Twelve Month) stands at a stellar $4.49bn USD. They have a 96% occupancy rate and a net income of $1.54bn USD with an annualised growth rate in AUM of about 14% p.a. Over the past decade, Price to Book stands at 2.98.
My Expectations: A great long-term staple for the portfolio, though the price as it currently stands represents a price-sales ratio of 21.98 (much more relevant in a growth context). Our view is to buy over the trailing average and sequence in at circa. 15x for the more conservative or around 17x for the reasonable, more likely given the rate environment. It is nevertheless a hold for me over the long-term (broadly speaking, buy the dips or set and forget).
Dividend Yield: 1.87% with expectations of continued double digit growth (circa. 15% p.a.).
Public Storage (PSA.NYSE)
Much like Prologis, Public Storage represents another story of American entrepreneurship. Simply put, it is in the business of self-storage across the US (where it is the market leader), Canada and Europe. Some of you may have come across the company if you have a penchant for American television and watched the series Storage Wars, where contents of a storage unit are put up for sale, practically sight unseen, via auction for failure to pay rent.
The business started with a simple concept. Allowing consumers to pay for square footage to store belongings and doing so at effectively the same rate as commercial or residential space but with a cost layout low enough to break-even at 35% capacity. Since the initial investment of $50,000 USD in 1972, and through the use of RELP (Real Estate Limited Partnerships), PSA now owns and operates 2500 self-storage facilities across 28 states or 1m square feet in real estate as well as exposure to the European and Canadian markets through equity investments (Shurgard Europe).
So, why do we like it?
This is a rather simple business and, while it may not be headline grabbing, there is a reasonable business case to be made for looking at self-storage as a viable investment given the significantly lower capex required and the demographic shifts occurring. Let’s start with the percentage of the broader population that uses self-storage. In the US, starting at 3% in 1980, the number stands at 9% today. With an increasingly aging population along with immigration within the 30-60 demographic, who remain the primary users for the business, we are likely to see continued organic growth across the sub-industry. Moreover, in comparison to her peers, Public Storage not only has scale across the US market but also brand recognition in what is a relatively consolidated market. To give some context to the actual numbers underlying the business, it has a market leading NOI (Net Operating Income) Margin at 75.9% compared to the nearest competitor, Extra Space, at 71.3%.
Going back to reflation (sensing a theme here?), the firm has continued to take advantage of the low rates of financing its debt at a blended rate of 1.9% with an 80-20 split in USD and EU (we would have preferred to see more Euro) and, more importantly, 86% fixed with maturities of 16.6 years (if we see CPI keep to our expectations then this is a great transfer of wealth mechanism from debt holders to equity holders). Debt stands at $5bn and additional acquisitions and developments continue to be financed with substantial injections from retained free cash flow. 2021 has seen them commit to higher rates of acquisition, $2.1bn USD, and there is over $700m USD in the development pipeline. This second aspect bodes well for solidifying their market leadership and sustaining earnings growth well into the future (in addition to increasing pricing power).
Getting to the numbers, revenue on a TTM (Trailing Twelve Month) stands at a stellar $2.97bn USD with a net income of $1.17bn USD. P/E stands at 46.45 and EPS at $6.88 USD/share.
My Expectations: A great business to own over a longer time horizon, much like PLD. They are operating in a secular growth story and are a reasonable reflation trade. The business’ development pipeline and acquisition binge should be reflected in future earnings growth as well as increased pricing power. There is a premium built in to the current valuation but it is worth paying given their market leadership and demonstrable track record. A long term hold for me.
Dividend Yield: 2.55%
A slightly lower result given the acquisitions over the past 24 months but, going forward, the payout should revise back to 2019 levels. Assuming this to be the case, 3.55% from CY22 onwards and 10% CAGR estimate from there (based on historic context).
Disclaimer: Both stocks are held in the G-REIT segment of TAMIM's Listed Property portfolio.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.