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 | | | | Prologis (PLD): Getting Back to Growth |
| | Led by real estate visionary Hamid Moghadam, Prologis (PLD) is a global leader in the logistics space. PLD is a multi-decade success story and has amassed an exceptionally strong portfolio of industrial real estate assets. Shares have performed poorly over the past three years as a result of pandemic-era supply and demand distortions. The tide is now turning. The long-term structural drivers of PLD are intact, and the company appears well-positioned to get back on the path of value creation.
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| On a sunny day in June 2022, a sixty-six year old businessman stepped out of his elegant home in the Pacific Heights section of San Francisco. Two men were waiting in the parking lot across the street. They pulled up in a car right next to him.
One of the men jumped out of the car, approached the businessman and waved a gun in his face. He went back into the car and sped off with his Patek Phillipe wristwatch.
The man who was mugged was physically unharmed—but he was pissed.
He was angry that his safety was violated. He was particularly angry about what this incident said about the city he had called home for decades.
As the top executive of one the largest publicly traded enterprises in the United States, he could have filed an insurance claim for the watch and moved on with his life. But that is not his style.
Hamid Moghadam, CEO of Prologis (PLD), was fed up with what was happening to San Francisco. He decided to use his position as a major business figure in the Bay Area to put pressure on local politicians to do something about it.
In a blunt letter to then Mayor London Breed as well as Governor Gavin Newsom, which was shared with the media, Moghadam demanded action. |
| | When this happened I said 'somebody has to get up and actually say enough is enough' and I decided to do that…. I get all kinds of San Francisco jokes when I travel the world. It's almost embarrassing and that's the perception and that affects tourism and convention business. A lot of jobs are involved. Once you go over the tipping point, it becomes very, very difficult to getting it back. - Hamid Moghadam |
| | Moghadam understands what happens when society disintegrates and how quickly things can change. It’s the basis of his life story.
Hamid Moghadam was born in Tehran, the capital city of Iran, in 1956. Iran is largely known to Americans today as a repressive state, a sponsor of terror, and possibly the biggest threat to international security.
Iran was not always like this.
When Hamid was just four years old, in 1960, the Shah of Iran, Mohammad Reza Pahlavi, began to implement the White Revolution—a Western-oriented reform agenda focused on industrialization, education and health care.
A cultured and refined aristocrat, Pahlavi was educated in Switzerland and France. He was known to be especially partial to Francois Rabelais, the great literary figure of the French Renaissance who wrote about personal freedom and the absurdity of war.
Many historians are critical of the Shah’s harsh treatment of political opponents. His regime was, after all, a dictatorship. But it was arguably a benevolent one, and Iran prospered under his leadership.
Photos from this era tell the story.
In the 1960s and 1970s, college girls in Tehran wore mini skirts to class. On the weekends, the country’s youth wore bell bottoms, drove around in Volkswagen bugs, and listened to rock music. |
|  | |  | | Young Hamid Moghadam was being groomed to help his wealthy family advance their already considerable business interests in this booming Iranian economy. His father ran a conglomerate that was active in development, construction and off-shore drilling.
Like the Shah himself and other children of elite families, Hamid was raised with a very Western outlook. As a youngster, he attended an American high school in Tehran and later a Swiss boarding school.
Hamid was not just financially and socially privileged, but he was also intellectually gifted.
When he turned sixteen in 1973, he was accepted at MIT. He headed off to Boston where he earned a bachelor’s degree in engineering and stayed an extra year for a master’s.
Hamid’s father then died unexpectedly. He immediately prepared to return home to help run the family business, which was always the plan.
But history got in the way.
In early 1979, the Iranian Revolution resulted in the exile of the Pahlavi family and the rise to power of Ayatollah Khomeini.
Khomeini came from a family of clerics. He fiercely opposed the White Revolution, which he saw as a form of Western colonialism and submission to the United States and Israel.
Iran abruptly became an Islamic Republic. All of the businesses that the Moghadam family operated were nationalized. Western influences of any kind were systematically rooted out of the country.
With Iran in turmoil, and nothing to come back to, Hamid’s mother urged her son to remain in the United States for further education. He applied to various business schools and chose Stanford, primarily because he liked the northern California climate.
From privilege to pariah
Moghadam earned his MBA from Stanford in 1980. There was nothing left for him in Iran, which was in complete disarray. So he set out to look for a job in the United States.
Despite his fancy degrees, he encountered two main problems.
First, the U.S. was in the midst of a serious recession. Fed Chair Paul Volcker was lifting interest rates aggressively to combat runaway inflation. Unemployment rates were spiking.
Second, the Iran-Hostage crisis had been going on for several months. More than fifty U.S. citizens were being held captive by the Ayatollah. The American public was outraged.
As Hamid interviewed for jobs, his Iranian heritage was not exactly helping. He applied for 86 jobs and got 87 rejections. One company accidentally rejected him twice.
Just a few years prior, he was at one of the most respected academic institutions in the world, preparing for his father to hand him a business empire.
Now his father was gone, the empire was gone, and corporate employers winced when they saw his name on top of a resume.
Twenty-four year old Hamid, who once had everything, now had nothing to fall back on but his own brains and instincts. He realized that if he wanted to run a business empire, he would have to build one himself.
And that’s exactly what he did.
The origins of Prologis
Moghadam graduated near the top of his class at Stanford. He did eventually manage to get one of his professors, John McMahan, to hire him to do some real estate advisory work.
In that role, he worked alongside David Abbey. Moghadam and Abbey were later introduced to a prominent real estate lawyer named T. Robert Burke.
In 1983, AMB Institutional Realty Advisors was formed (an acronym that combined the first initials of each of their last names).
The group raised money from institutional investors, like universities, pension funds and foundations. They managed to raise $70 million and experienced some early success based on their ability to turn around underperforming assets.
Moghadam’s global perspective—specifically, his attention to trends playing out in countries that others may have tended not to think about—was critical.
An early and important strategic insight of AMB was to focus on the growth opportunity presented by emerging market consumer demand.
AMB’s competitors built warehouses in the lowest cost areas they could find. Hamid pushed for a different approach—emphasizing locations near global trade hubs like seaports and airports.
The idea was to capture rapidly growing export demand coming from countries like Brazil, Mexico and China—relatively small economies in the 1980s that were about to take off.
Instead of building on the cheapest land, AMB built facilities on strategically located, supply-constrained land. |
| | Consumers in those economies are eager to buy things we take for granted, everything from toilet paper to tires… Scarce real estate is always going to become more valuable. - Hamid Moghadam (May, 2014) |
| | The experience of having the rug pulled out from under you, like what Hamid went through as his home country collapsed, can change your mindset. One becomes highly attuned to signs that things are headed in the wrong direction.
Moghadam was becoming the company’s strategic visionary.
He made another smart decision in the 1980s when AMB exited the office market, which was oversupplied and headed for a cyclical correction.
Focus on logistics
For most of the 1990s, AMB owned industrial assets, like warehouses (also referred to as distribution centers), as well as retail assets, like strip malls. The company decided to go public in 1997 and became a publicly traded REIT (Real Estate Investment Trust).
In the mid-1990s, REITs were attracting a lot of capital as a result of favorable legislative changes to their structure as investment vehicles.
The key feature of REITs is that they exempt real estate owners from paying corporate income taxes so long as they pass through the vast majority of their net income to shareholders.
AMB’s Initial Public Offering as a REIT prompted the company to focus its strategy even further. Professional investors prefer specialist “pure play” operators and usually reward them with higher valuations.
Moghadam had another compelling reason to focus on logistics.
In addition to mega-trends like globalization and the rising emerging market middle class, another big thing was happening—it was the dawn of the Internet.
With its origins in the San Francisco Bay Area and Stanford University connections, AMB was perhaps more tuned into the developing e-commerce opportunity than peers in New York and Chicago.
Now a public company, with Moghadam as its CEO, AMB had more capital. The company began to deploy it thoughtfully—but aggressively.
AMB further increased its acquisition firepower by divesting its retail holdings. The funds were used to build up its logistics footprint around the country with an eye towards serving e-commerce companies.
The early 2000s dotcom burst was tricky for AMB, but the company managed through it. They had made a $5 million investment in Internet grocer Webvan, for example, and also leased the e-commerce start-up some 1 million square feet of warehouse space.
With a low-margin business model that was in retrospect non-viable, Webvan went under. AMB’s small strategic investment was worthless. But the Webvan leases were quickly re-assigned to credit worthy tenants, and AMB emerged from the situation basically unscathed.
While e-commerce experienced a rapid boom and bust cycle in the U.S. at this time, globalization continued apace. AMB spent a lot of resources developing advanced logistics facilities for global companies around the world, where warehouse properties tended to be lower quality. |
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| Our customers are pushing us to help them with their global problems. There are few reliable warehouse sources that are up to international standards and companies want to simplify the business relying on a few vendors. - Hamid Moghadam (2002) |
| | David buys Goliath
AMB grew prudently in this era. The company’s much larger peer in logistics real estate, a company called ProLogis, was more reckless.
Through a series of acquisitions, ProLogis had become the largest industrial property player in the world and became an S&P 500 stock as early as 2003.
Burdened with vast debt and a shaky global economy, ProLogis survived the Global Financial Crisis of 2008 but was left in a difficult situation.
By 2011, ProLogis had an attractive global logistics footprint—but a depressed share price, a stretched balance sheet, and a management team with a credibility problem.
This opened the door for Hamid to take AMB to the next level.
AMB and ProLogis announced a merger of equals in January 2011. Moghadam and ProLogis CEO Walter Rakowich were initially co-CEOs.
The combined company, which was now called Prologis (with a lowercase “L”), created the premier industrial real estate company in the world with a market value at the time of $24 billion.
By 2013, Rakowich stepped down. Moghadam became the sole CEO of the business, which was headquartered in San Francisco.
As the global economy healed and e-commerce re-emerged and began to revolutionize the global retail landscape, Prologis soared under Hamid’s smart and steady leadership.
Prologis today
Hamid Moghadam remains at the helm of the Prologis, which is by a wide margin the largest owner of logistics real estate in the world.
The company’s portfolio consists of some 5,600 buildings, representing 1.2 billion square feet across 20 countries.
Serving approximately 6,700 customers, PLD now generates over $6 billion per year of net operating income. The company’s land bank has a book value in excess of $40 billion.
The business controls what is widely recognized as one of the largest and most important commercial real estate platforms in the world.
PLD’s vast network of distribution centers are relied upon to support a flow of goods every year that has a total value representing approximately 3% of global GDP.
By square footage, approximately two-thirds of the PLD portfolio is based in the United States.
PLD has amassed an irreplaceable collection of distribution centers in the most strategically relevant economic centers and transportation hubs in the U.S. |
|  | | A decade of growth
Following the AMB merger of equals with ProLogis, there was a period of approximately ten years in which things went swimmingly well for Moghadam and PLD shareholders.
The time frame extending from 2011 to 2021 was a good one to be an investor in the stock market and an even better one to be invested in PLD shares. PLD shares compounded at 19.5% per year, versus 15.0% for the S&P 500.
Real estate stocks, as reflected by the performance of the passively managed Vanguard Real Estate ETF (VNQ), lagged PLD and the S&P 500. But real estate stocks in this time frame performed quite well in absolute terms, delivering an 11.0% annualized total return. |
|  | PLD vs. S&P 500 and Real Estate Sector (2/2011 - 12/2021) |
| The pandemic boost
When the Covid pandemic shook the world in early 2020, it was initially damaging for PLD and the rest of the market.
Investors dumped their shares in late February and March of 2020 in anticipation of a potentially brutal global recession.
Yet by June 2020, PLD shares returned to their pre-pandemic highs. The S&P 500 fully recovered by the end of August.
PLD benefited from two key developments in the aftermath of Covid.
First, the plunge in interest rates. The Federal Reserve cut the Fed Funds rate to the zero bound, while investors flocked to the safe haven of U.S. Treasuries.
The valuations of companies built around secure cash flow streams benefited from a dramatically reduced cost of capital. PLD was one of them.
PLD derives the vast majority of its revenue from long-term leases that it signs with customers who want access to its warehouses.
Second, it became apparent that PLD was going to be a structural winner from changing consumer behaviors, which would also prop up the tech sector as a whole.
Covid lockdowns were horrible for many sectors, from travel and hospitality to commercial offices to automobiles. But they were good for digital business models, like Zoom and Netflix.
And the new “stay-at-home” economy was especially good for e-commerce.
E-commerce booms
Since the birth of the internet, e-commerce has significantly outpaced and taken share from traditional retail. But e-commerce sales truly exploded during lockdowns.
E-commerce sales surged some 44% from year-end 2019 to year-end 2020, as lockdowns went into effect. This compares with 15% average annual growth over the prior ten year period. |
|  | | Combined with supply chain disruptions and other distortions in the economy, this led to an exceptionally favorable market situation for logistics solutions providers like PLD.
E-commerce is central to the PLD story because e-commerce retailing requires approximately three and a half times as much space in warehouses versus traditional brick and mortar retail.
Prologis estimates that the typical e-commerce retailer requires approximately 1.2 million square feet of distribution center space to support $1 billion of sales.
This compares with approximately 340,000 square feet required to support $1 billion of sales generated by a typical brick and mortar retailer.
Whereas brick and mortar retailers hold much of their inventory in their customer-facing store locations, e-commerce players essentially only hold inventory in warehouses.
There are a few other factors that drive up the warehouse space requirements for e-commerce companies, including a tendency to have greater product variety as well as complexities around direct shipping to consumers and returns.
Soaring rents
PLD shares took off in 2020 as investors reacted to acute shortages of warehouse capacity. Retailers were scrambling to find space, which led to rapid growth in market rents.
Analysts who cover the stock were lifting their assumptions for the rental growth PLD would achieve in the future. Meanwhile, as interest rates came down, the discount rate used in all of their financial models was coming down.
The end result was major upside in PLD shares over the course of 2020 and 2021. From the March 20, 2020 trough to the December 31, 2021 peak, PLD shares returned a remarkable 178%.
As with many stocks, the final day of 2021 would have been a good day to sell. The stay at home theme was getting overdone.
The dominant market narrative would soon shift to rising interest rates as inflation finally started to seep into the over-stimulated economy.
However, unlike many stocks, PLD has yet to fully recover.
Since year-end 2021, PLD shares have meaningfully underperformed the S&P 500 and, especially more recently, real estate stocks in general. |
|  | The Covid hangover
PLD may be a great company, but the shares had essentially become overvalued by the end of 2021.
Investors aggressively priced in the rapid improvement in market conditions—in terms of rents and replacement cost for new warehouses—and were pricing in further improvements into the future.
They were being too optimistic. It soon became apparent that the fast upside in logistics real estate was a cyclical phenomenon.
Rather than deliver continuous growth, pricing for warehouses would soon stall and even trend down. |
|  | |  | | Profitability is still high
PLD shares have performed very poorly since they peaked at year-end 2021, delivering a total return of approximately -23% (versus the S&P 500 total return of 34%).
Given this performance, one might naturally assume PLD’s profitability has declined and the company’s financial position has deteriorated. Yet it has not.
Instead of Earnings per Share (EPS), investors in REITs tend to use a metric called Funds from Operations (FFO), or FFO per share.
FFO provides a cleaner look at the profitability and cash flow generation of a REIT because it removes accounting assumptions and one-time expenses that muddy the picture.
Even though the share price is lower, PLD’s FFO per share was, remarkably, 34% higher in 2024 than it was in 2021.
The reason the share price is lower today than it was three years ago is that the multiple that investors applied to the company’s FFO back then was nearly twice as large as it is today (approximately 40 times versus 20 times). |
|  | | There is an interesting quirk about logistics real estate that any investor in the space needs to understand.
Because market rent levels rose so much over the past several years, the actual rent received by landlords like PLD is still lower than prevailing rent levels in the market.
Back in 2021, when PLD shares peaked, investors applied a very large multiple to the shares because they expected future leases would be struck at even higher levels, given the surge in market rents.
When it became apparent that the growth in market rents was not sustainable, they adjusted their expectations and the share price came down.
But even with the moderate decline in market rents from the pandemic peak, it is important to emphasize that in-place rents (the rental income PLD is actually receiving from tenants) are still below market rents.
In fact, according to the company, market rents are still 35% higher than in-place rents.
This means that even if market rents do not rise further, as leases expire, PLD’s profitability will almost automatically rise as the old leases “catch up” with the higher pricing environment. Many of these leases could have been signed seven years ago or even earlier.
Rents poised to grow again
PLD shares are currently priced with very cautious expectations about future market rental growth. This is not surprising. Most investors like to have clear evidence of a turnaround before pricing one in.
But investors also have a tendency to overweight recent experience. This is why they overpaid for PLD at the end of 2021 when rental growth was (unsustainably) surging.
And it’s why they are potentially undervaluing PLD shares right now.
Rental growth stalled after the pandemic for two main reasons.
First, the economy reopened with the end of lockdowns, which allowed supply chains to normalize and led to a deceleration in e-commerce growth (but never a decline). The mad scramble for warehouse space came to an end.
Second, because rents were surging, developers committed a lot of capital towards building new warehouses. With more supply on the market, and demand growth ebbing, prices adjusted. |
|  | | The rapid addition of new capacity to absorb all that excess pandemic demand put pressure on market rents. All those new warehouses had to be filled, and landlords have had to compete for tenants.
The supply side of the equation is now normalizing, however. Square footage growth is in fact now back to levels last seen nearly a decade ago.
Arguably, the industry is now underbuilding new capacity, given that incremental growth in e-commerce sales is much higher today, in absolute terms, than it was five to ten years ago.
E-commerce is still growing at similar rates as it has in the past—but off a much higher base. This implies more square footage will be required than in years past to meet steadily growing demand.
Don’t forget about inflation
Another factor to consider is inflation. Over the past four years, thanks to money printing, deficit spending and other causes, the U.S. economy has seen cumulative inflation of approximately 20%.
The cost of building a new logistics facility in 2025 is significantly higher than it was in 2021. All of the inputs cost more: land, materials, labor.
The Producer Price Index (PPI) for Construction has in fact significantly outpaced growth in consumer prices. Since year-end 2021, construction costs have increased nationwide by approximately 35%. |
|  | Real estate developers will continue to refrain from adding warehouse supply until market rent levels are high enough to provide them with adequate expected returns on their investment.
PLD management estimates that, based on average construction costs, market rents need to grow on average another 15% above current levels to justify adding new warehouse capacity.
This explains the severe decline in logistics real estate construction over the last three years. The math just doesn’t work for developers in most cases. |
| | WHY BUY PLD NOW?
To summarize the situation on rents, market rents on average are currently 35% higher than the contracted rents that support PLD’s current cash flows.
So as leases expire, existing tenants or new tenants will typically enter into new leases that are 35% higher.
This is called embedded growth. About 10% to 15% of PLD leases expire annually, with an average lease term of 5.5 years.
On top of this, because of elevated construction costs, market rents may need to rise some 15% to induce developers to add capacity and bring supply and demand into balance.
The “bottoming process”
Hamid Moghadam is confident that after three years in the doldrums, we are now at a turning point in the supply/demand dynamic for the industrial real estate business. |
| | My view is that the market is going to surprise people in the back half of the year. That's my view. I've been wrong before, but that's my view. - Hamid Moghadam (1/21/2025) |
| | Just a few weeks ago, PLD shared a bullish outlook with the investment community on its fourth quarter 2024 earnings call.
They are seeing multiple signs of an inflection point internally. This is based on a combination of expressions of interest from customers who need warehouse space and continuously falling new supply. |
| | More importantly, indicators in our pipeline and dialogue with customers have us encouraged that conditions are set for a recovery in net absorption, leading to a bottoming of global rents…. Customer engagement is improving, and we saw a notable increase in activity amongst our larger global customers, who often lead in the recovery of demand as we've seen in past cycles…. We also know that completions will decline significantly, contributing to a supply forecast that is approximately 35% below 2024. As such, we expect a decline in vacancy over the year, which will pave the way for rent growth. Longer term, we continue to see the path for uplift from market rents to replacement cost rents, a dynamic that will build upon our already significant lease mark to market. Today, we see replacement costs as 50% higher than in-place rents. - Timothy Arndt, PLD Chief Financial Officer (1/21/2025) |
| | A mid-teens (or higher) return profile
The fourth quarter earnings call led to some mild upside in the share price, but valuation metrics remain quite low by historical standards.
As noted earlier, the current FFO multiple (price divided by FFO per share) is approximately 20. This compares with a peak around 40 times in 2021 and a long-term average closer to 27 times.
The current dividend yield, around 3.5%, is higher than at any point since the merger in 2011. This reflects the high degree of cash flow the business is generating as well as the market’s current unwillingness to price in substantial growth in that cash flow.
Despite the low multiple, given clear trends in the logistics space, analysts do expect growth.
Consensus expectations for 2029 call for FFO per share that is approximately 40% higher than expected 2025 levels.
Let’s assume these forecasts are basically accurate.
On top of an approximately 3.5% (and growing) dividend return, if PLD shares simply hold their current (historically low) multiple of FFO, this implies investors in PLD can expect about 10% price appreciation annually over the next four years.
If the multiple were to expand towards historical levels, in recognition of a resumption of the long-term growth trend, this could drive additional upside.
The net result is a potential annual total return profile in the mid-teens or higher over the next several years.
Data center kicker
PLD is primarily an owner and developer of real estate for the logistics industry. But as demand for data centers has boomed in recent years, the company has been active in the data center space as well.
PLD has a large land bank and also owns many warehouse facilities which, by virtue of their location or other factors, have a higher and better use if they are reconfigured into data centers.
The company is currently targeting $7 to $8 billion of data center developments by 2028. The economics of these projects can be quite favorable, with each dollar invested yielding a development margin of 25% to 50%.
While a smaller part of the overall story, investors should view PLD’s data center operations as an incremental source of growth.
To the extent AI-driven demand for data centers surprises to the upside in years ahead, it could become even more impactful.
It is also worth noting that a data center is fundamentally a very high tech type of warehouse—albeit one that houses computer servers and other technology, rather than consumer goods.
To a meaningful extent, developers of data centers and logistics distribution centers are competing for the same resources—land, construction materials, engineering talent.
Over time, growing demand for data centers has the potential to drive up warehouse development costs (if they are not already). This in turn may drive up rents and serve as a source of further upward pressure on the value of PLD’s portfolio of logistics assets.
Bouncing back
Hamid Moghadam has sustained a number of setbacks over the course of his life and career. PLD’s post-pandemic underperformance is arguably quite mild in comparison.
The key drivers of PLD’s success remain in place.
E-commerce continues to grow faster than the retail sector as a whole, which creates steady demand growth from tenants.
Meanwhile, development costs remain high, while excess warehouse capacity from the Covid era is becoming almost completely absorbed.
Perfectly timing the bottom of any business with cyclicality is always tricky. From the standpoint of a long-term investor, perfect timing is also unnecessary.
We view current levels as a compelling entry point for long-term investors in PLD. |
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