ed. note: The first version of this article was originally published in September of 2018, when we initially saw these ads rolling. It has been re-circulated several times, most recently because of the attention Jeff Bezos is getting for becoming the wealthiest person in history, so readers are asking again and we’re re-posting the answers and our analysis. The answer is the same as it was when our teaser solution for the first version of the pitch was published two years ago, my analysis and commentary were updated in mid-June so are slightly out of date, but the prices of most of these stocks are still fairly close to where they were then.
Another day, another “secret” that we’re told billionaires are using to grab big ol’ checks… all promised to you in exchange for your subscription to a newsletter.
This time, it’s The Wealth Advisory from Briton Ryle over at Angel Investing — that’s an “entry level” newsletter (now $99/year, though has often been sold at $49) that seems to focus on income investments… and the big pitch is that he’s got a secret way to earn “Prime Profits” from Amazon and make up to $48,000… without buying Amazon shares.
Here’s a taste of why Gumshoe readers were intrigued:
“You see, despite doing $200 billion in revenue last year…
“With more than 300 million customers around the globe…
“And more than 560,000 employees…
“Amazon is legally obligated to hand over Prime Profits to people like you. All you’ll need to do is take advantage of a little-known law to start collecting life-changing checks.
“In other words, every time someone buys a book…
“Every time someone orders toilet paper…Are you getting our free Daily Update
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“Every time anyone buys anything…
“You’ll get paid!”
We know it’s not going to be that simple, of course, but that’s how they draw readers in. Much of the ad is about how this is a secret that only billionaires know, that there are secret piles of money available — which feeds into the common suspicion that there are just buckets of money sitting around waiting to be grabbed by in-the-know folks. That’s not really true, of course, and if it were no one would sell this “secret” for $99… but we have a tendency to suspend disbelief when that “greed” impulse clicks in.
More from the ad:
“As business magazine Inc. reports: ‘Billionaires know that there is a market for secret or hidden money…'”
That, of course, would be “reporting” that got someone fired if they worked for an actual news organization… that quote is from a silly reprint of a clickbait Quora exchange that, yes, did appear on Inc.com. It doesn’t mean anything.
So where does this money come from? Can we collect it? Why does it exist? Let’s sample some more from the ad…
“… mega-banks and investment firms, like Vanguard, BlackRock, State Street Corporation, JPMorgan Chase, Bank of America, Morgan Stanley, and Deutsche Bank.
“They’re all collecting checks from this legally mandated ‘tax’ on Amazon’s profits.
“And now, for the first time ever, I’ll reveal how everyday Americans can start collecting their own Prime Profit payout.”
Where does this “payout” come from? Well, there’s no clear mention anywhere in the ad about buying something, at least that I saw, but I can promise you that yes, there are checks going out — but they’re not going out to “everyday Americans,” they’re going out to people who invested in that business in some way.
Maybe that’s you, maybe not — but this is probably a dividend-paying stock of some kind, and if you don’t own shares you don’t get dividends. The “there is no free lunch” rule still applies…
…but we’ll get into more of that in a minute, let’s first check the clues and see what investment it is they’re referring to… why is Amazon “obligated” to “hand over” cash to “everyday Americans?”
“… it’s all because of a law published in 1952, during former President Harry S. Truman’s administration. And no one can do anything to stop it from paying you….
“U.S. law Uniform Commercial Code (U.C.C.) Section 2-301 forces Amazon to send money back to you.
“That’s how you’ll start to collect $48,000 in Prime Profits this year.”
The Uniform Commercial Code is not a federal law, in case you’re curious, it’s a guideline that was used to try to standardize state laws — it was first published in 1952, and Truman was president then, but that Section 2-301 seems to me to be just a standard baseline of commerce, it says, in total, that “The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract.” I’m not a lawyer, but that sounds like sellers sell, buyers buy, and you better fulfill your contractual agreement on both sides.
So yes, pretty much all of commerce is probably somehow connected to that clause of the UCC (though basic “sell something and get money for it, as agreed” transactions also have other backing in law in the US and elsewhere). That’s essentially a meaningless hint, designed to make these “Prime Profits” seem both legitimate and mysterious.
We also get some chatter about Amazon itself in the ad…
“Amazon recently announced that it’s bumping the cost of its Prime membership by $20. And that will add $2 billion to its bottom line.
“That’s not pocket change.
“But that announcement only moved Amazon’s share price 7% higher, enough to turn $10,000 into around $10,700.
“I can’t speak for you, but that’s hardly a mind-blowing profit to me.
“If you want to really tap into Amazon’s tremendous size and growth, and you should, then Prime Profits will let you collect $48,000 — or more — this year…”
Still no mention then of the fact that you have to invest to receive this money… but they are clearly setting up an expectation — by using that “$10,000 turns into $10,700” example in the same discussion, they teach you to imagine that $10,000 is what you invest… and that you’ll then collect $48,000 or more this year.
That, to put it simply, is crazypants.
Which is followed by more of this “enroll” talk, which, of course, takes us away from that cruel “it takes money to make money” reality:
“Whatever you’d do with an extra $48,000 this year, I’m urging you to ‘enroll’ today…
“Because there have already been 80 payouts since Amazon started paying Prime Profits.”
They didn’t update that number… presumably there have now been at least 85 quarterly payouts… but I digress.
And apparently these “Prime Profits” payments have been rising…
“Prime Profit payouts will be getting even bigger.
“In fact, they’ve already increased seven times since I started following this opportunity.
“And not in pocket change, either…
“They’ve almost doubled in size, 89% bigger to be precise.
“The latest bump came a few months ago.”
So that’s a fair number of clues — 89% increase in “Prime Profits” over some undetermined amount of time, and seven increases in the payout… plus at least 80 payouts over some undetermined amount of time (since there are some other references to quarterly “Prime Profits” checks, that probably means this business or program has been around for 20 years).
But why would Amazon have to pay you? This is when it gets a little crazy again:
“Remember when Amazon was accused of being anti-competitive, of building a de facto monopoly, and of ripping off USPS?
“Well, the U.S. federal government doesn’t stand for that.
“And it has two ways of punishing Amazon:
“It could choose to break up the tech giant like it once ordered Microsoft to do in 2000.
“Or it could ensure that Amazon continues to pay out millions of dollars every single year to individuals like you and me.
“That last one may sound unusual, but it’s actually a little-known way that Washington puts dollars back into the pockets of everyday Americans.”
OK, we’ve gone beyond “crazypants” here and into something that’s actively misleading. They call up the consumer relief payments that the big banks have been forced to make, mostly to mortgage customers who were scammed, in the years following the financial crisis… which has absolutely nothing to do with Amazon paying out “prime profits” or the government considering antitrust action against Amazon or taking advantage of the postal service or making President Trump mad.
And here’s one last bit from that pile of compost that’s designed to make you believe that you’re about to get free money from some obscure government program that was previously reserved just for billionaires:
“Now, Amazon has struck a deal with a branch of the U.S. government to get cash into the hands of everyday people. And it’s grown to the tune of more than $1.498 billion every single year.
“That’s also the reason why you probably haven’t heard of Prime Profits before…
“They make Amazon look like it’s done something wrong. And it would never admit that.
“And that’s why this insider knowledge has only been on the minds of America’s elite billionaires.”
OK, so no, none of that is really true. Amazon has not “struck a deal” with the government to distribute cash to “everyday people” — at least, not in the way I think any ordinary person would define those terms.
So… at this point it probably won’t surprise anyone to learn that those legal references and the chatter about a “deal with the government” or about distributing cash flow are all misleading ways of describing Real Estate Investment Trusts (REITs), which were set up by the government over 50 years ago (under President Eisenhower, in 1960) to “democratize” real estate investing. They make it easier for investors to buy shares of real estate owning or operating businesses, and companies that choose REIT status don’t pay corporate taxes as long as they pass along at least 90% of their “taxable” income to shareholders in the form of dividends (and then, of course, you pay the taxes on those dividends, so the government gets its cut that way — unless you hold them in a Roth IRA or something like that). REIT shareholders also got a bit of a break on the tax bite from those dividends in the latest tax cuts, in the form of a 20% deduction on this kind of “pass through” income.
So when you see these comments about a stock that’s “legally required” to pay you checks, it’s very often a reference to something like a REIT, a company that is indeed required to pay out their profit in dividends if they make a profit. In practice, many REITs actually pay out much more in dividends than they would have had in “taxable income,” mostly because depreciation can be very high and that depreciation, though real, is not a cash cost — and many REITs have been quite successful at selling new shares and borrowing money to acquire new assets or fund capital projects, rather than setting aside their depreciation expenses to maintain the business, which helps to keep dividend payments rising. They know that rising dividends drive rising share prices, and most management teams are compensated in stock and also collect dividends… incentives matter, and they’re not dummies, they know that maximizing the dividend is important (within reason, of course, and keeping the payout ratio in a safe range to make sure the company can keep operating).
What does this have to do with Amazon? Not all that much, except for one thing: Amazon rents space for offices, warehouses and other logistical requirements for their sprawling enterprise… and some of that money they spend for space goes to pay for leases from REITs, so, indirectly, some REITs are paying out a portion of the rent money that they get from Amazon.
So no, it’s not accurate to say that “The U.S. government has quietly slapped a tax on Amazon using U.C.C. 2-301.” Nor is this “the government’s way of making sure that giant corporations can’t get away with being anti-competitive.”
One last bit from Ryle:
“To start collecting Prime Profits, you’ll have to stake your claim in an entity that’s created to put money into the hands of people like you….
“But here’s the best bit…
“The entire jackpot of over $1.498 billion must be paid out, no matter what.
“You see, even if Amazon’s stock drops by 20% overnight…
“Even if the whole market falls through the floor and people start to panic in the streets…
“You’ll still be collecting lucrative, consistent Prime Profit payouts.”
OK, that’s more or less true — REIT shareholders will collect dividends as long as the REIT is profitable, and the law requires Amazon (and every other business) to fulfill their contracts, which means, in part, that they have to pay the rent on their leased properties. That doesn’t mean REIT shares can’t “fall through the floor” when the market collapses, particularly if their tenants face hardship and can’t pay the rent or the REIT borrows too much and can’t make its interest payments… or when there’s overbuilding and rents fall… though over time, REITs have usually been less volatile than the overall market.
In fact, for some very long periods of time REITs have beaten the overall market — though, as with everything, a lot depends on when you buy and whether you reinvest the dividends. The total return (not including dividend reinvestment) for REITs has been much stronger than the market over the past 19 years (that’s when the iShares US Real Estate ETF launched, for comparison’s sake)…
Though over the past 10 years, shifting to the Vanguard Real Estate ETF (VNQ), which is younger and my preferred REIT ETF, they have pretty much been in line with the market most of the time — beating the S&P for many years after the financial crisis, but falling behind over the last year or two when interest rate expectations rose and large-cap tech stocks began to really drive the S&P 500, with REITs falling just as badly as “normal” stocks during this coronavirus crash….
That’s just for some broad context, though — Ryle is teasing a specific REIT (or perhaps a couple of ’em).
Then we get a bit of a stretch:
“Other Americans are trying to squeeze out 5% returns by investing in Amazon. But you’ll be cashing checks that the tech giant is legally obligated to hand over.”
I don’t know where that’s coming from — I was probably the last person to finally give up on saying “it’s overvalued, I’ll wait for a dip” and buy Amazon shares back in 2017, and yet it has almost tripled since then. No one is buying Amazon shares in hopes of a 5% return.
But, of course, Amazon doesn’t pay any kind of dividend, and it’s a unique company that’s wildly overvalued by most of the fundamental metrics that investors use to value stocks. As with Shopify (SHOP), which we also talk about regularly in these parts, it’s a story about a massive shift in the retail economy and a belief that these companies will win by investing heavily in that shift.
So where does that lead us? Well, I did take another quick spin through the world of logistical and warehouse REITs just tao make sure… but it seems our teaser is still pointing at the same stock….
Prologis (PLD), the largest owner of warehouses and logistics space in the world and one of Amazon’s many landlords, went ex-dividend yesterday (meaning you had to buy it by September 15 if you want in on that next “check”), so that’s almost certainly still the primary stock being teased. The current ads don’t cite this payout date, but over the past couple years that has tended to be almost the only part of the ad that they update.
And since everyone was worried about real estate due to the coronavirus shutdown, it’s worth noticing what rents REITs are collecting — ProLogis noted that 24% of their tenants had asked for some kind of rent relief through the coronavirus shutdown, but monthly rents were coming in pretty well, at least compared to weaker office and mall REITs, and as of their second quarter they had ramped their forward guidance back up to a little above where it was in January… so the logistics business seems to be going just fine, and some of their tenants have reported a little weakness but there doesn’t appear to be any crisis.
The nice thing about being a huge company is that ProLogis can probably get through a tenant default or two a lot better than the smaller players might, but it’s not just Amazon they work with — many of their largest tenants are still quite strong, from Walmart and Amazon to FedEx and DHL, but they have hundreds of tenants… and companies that are really struggling right now, like department stores and other “bricks and mortar” retail operations, use distribution networks and warehouses, too.
Are there any other warehouse/logistics REITs you might want to consider? Think any of them are a better match for the clues? Let’s go through the list…
- Duke Realty (DRE) just paid their latest dividend a few weeks ago, they’re the only one that’s even close to being a real competitor and their yield and dividend growth has recently been about the same as ProLogis.
- WP Carey (WPC), which is partially a warehouse REIT, increases its dividend every quarter by a fraction of a cent… the ex-dividend date for the next payout will be in about two weeks — this one is seen as riskier by the market because they lease to single tenants and some of them are probably in financial trouble… though they were still collecting 95% of rent as of May, the second quarter report did not cause any panic, and the yield is still fairly high at 6%.
- PS Business Parks (PSB) has a good record of dividend increases and also went ex-dividend this week. I’ve actually looked at this one in the past and it’s somewhat compelling, but they’re not really an Amazon landlord and not as focused on huge warehouses — they tend to own smaller business park facilities that have a shop or warehouse in back and a customer-facing office out front, yield is about 3% but it has now been two years since they raised the dividend. Rent collection has started to recover for them, back up to 95% of rent billed being collected for August.
- Stag Industrial (STAG) pays monthly and has a somewhat higher yield than most at 4.5%… and they also raise the dividend regularly, though by an almost microscopic amount — they were collecting close to 90% of rent during the coronavirus shutdown, though they don’t update with monthly press releases like some. This has been publicly touted, along with ProLogis, by Briton Ryle in free articles since the first version of this ad appeared
- First Industrial Realty Trust (FR) goes ex-dividend in two weeks, with a current yield of about 2.5%… they have increased the dividend every year for seven years now, most recently by 9% in February. They said they had collected 99% of August rents last time they reported, so it never got very bad for them but they did bounce back pretty quickly.
- Rexford Industrial Realty (REXR) is fairly young in this group, and has raised its dividend five times since going public… their rapid dividend growth (15% this year) has boosted the stock, but the current yield is low, below 2%, and their ex-dividend date is in two weeks. They just announced that September rent collection is tracking at pre-pandemic levels, but that’s only about 96% for July and August so there’s still some weakness.
- EastGroup Properties (EGP) has hiked the dividend at least seven or eight times in the past decade, and does their dividend increasing in September so they just declared a 5% increase in the dividend a couple weeks ago — they go ex-dividend for the latest one on September 29 like many others, with the current yield coming in at a pretty average 2.4%. They say they collected 97.9% of rent in August, a bounce back from 95% or so a couple months ago.
- Lexington Realty Trust (LXP) is more like a smaller W.P. Carey, offering triple net leases to single tenants of all kinds, but some of their properties are industrial. They had been increasing their dividend very slowly, but cut it last year and it has been flat since, yielding just under 4% — though on the plus side, they said they did collect 99% of Q2 rents that were due, which is higher than the vast majority of REITs.
- Monmouth Real Estate Investment Corp (MNR) is quite small and hasn’t increased its dividend since 2017, the current yield is almost 5%… though the most recent dividend was actually paid this week. They now say that they’ve seen no “material adverse effect” from the pandemic, which is lovely.
- Americold (COLD) is a bit different, they specialize in refrigerated storage — though that could still apply to Amazon, given their grocery growth ambitions… but they haven’t been public for even three years, and have only increased the dividend twice. They haven’t talked much about their monthly rent collection, but a lot of their tenants are restaurant chains so I’ll be curious to see how the business holds up… investors are not worried at all, the stock quickly recovered its March drop and yields about 2.3%, though it did come back down a bit after just a “stable” second quarter report last month.
- Terreno Realty (TRNO) owns warehouses mostly in coastal cities, has strong dividend growth of 10%+ recently, yields 2% — they’ve been actively buying and selling properties, but I haven’t seen any disclosures of their rent collection progress during the coronavirus period.
- Industrial Logistics Properties Trust (ILPT) had its IPO in 2018, the dividend is relatively high for the group at almost 6% — like other RMR-managed REITs, it’s not so popular with investors, which probably explains the relatively high yield… the dividend has been flat for two years. They did grant some rent deferrals early in the shutdown, but they collected 97% of their rents due last quarter and, at least at first glance, the payout ratio looks surprisingly rational for a RMR REIT.
- Summit Industrial Income REIT (SMU.UN.TO) is a Canadian version of this same sort of company, and they pay a monthly dividend which currently yields about 4.7%… they have increased their dividend only very slightly over the past few years, much less than 1% a year on average (no increase this year), but did pay a small special dividend when they sold off their data center projects last fall. Their rent collection is over 96%, and another 3.1% of rent is subject to adjusted arrangements with tenants
And that’s pretty much the list. So there’s your quick rundown of the sector… what’s the answer?
Well, thanks to the fact that they list so many examples of individual people, we can actually give the Thinkolator a little boost… you know those references, they use them in pretty much every “income” newsletter teaser pitch, naming folks who’ve received outstanding payouts and implying, perhaps without so many words, that you can just sign right up and join them. They make that “you’ll soon earn $48,000!” blather seem like it might be real.
Ready for that littany of names? Here you go:
“All you’ll need to do is follow the simple steps that we’ll outline. And you’ll be able to join the handful of people who are already collecting tens — and even hundreds — of thousands of dollars.
“Take Edward N. He’s worked in construction since the ’90s. Today, he lives in Denver and recently collected $257,688 from this secret income stream.
“Or look at Eugene R. He works for a warehousing company, lives in Boston, and collected $106,242 throughout 2017. That’s an extra $8,853 every single month!
“And there’s Lydia K. She used to work at Los Angeles World Airports (LAWA) and now lives in Glendale, California. She received $37,556 last year from the same income stream that you’ll be getting an inside look at today….
“Take Carl W. He graduated from West Texas A&M University and spent the last 35 years working for various companies. He collected $118,307 last year, and his most recent payout was a staggering $32,265!”
“Irving L., or “Bud” to his friends. He received $58,000 last year.
“Bill Z. who works in transportation. He now regularly collects $35,596.
“And Thomas O. who lives in Indianapolis. He collected $14,118 throughout 2017….
“Take Christine G. She worked at Hilton Hotels and now collects $55,432 every year.
“Or Michael L., a General Motors lifer of 36 years. He recently collected $37,556.
“Then there’s Michael C. from California and Lori P. from Denver. They also collect Prime Profits but don’t want to say exactly how much.”
So what do all those people have in common? Here’s another list of people, see if it looks familiar:
Edward Nekritz, Chief Legal Officer
Eugene Reilly, CEO for The Americas
Lydia Kennard, Independent Director
Carl Webb, Independent Director
Irving Lyons, Lead Independent Director
William “Bill” Zollars, Independent Director
Thomas Olinger, Chief Financial Officer
Christine G. Bita, Independent Director
J. Michael Losh, Independent Director
Michael Curless, Chief Investment Officer
Lori Palazzolo, Managing Director and Chief Accounting Officer
So yes, that group of “everyday Americans” who are collecting huge amounts of dividend income from this investment are, in fact, most of the executives and members of the Board of Directors of Prologis (PLD).
So that’s where the Thinkolator brought us, thanks to an extra pint of oil, some well-placed hammer strikes, and a bit of cursing… Briton Ryle is (still) teasing us to buy Prologis shares as a way to get “Prime Profits” from Amazon.
And yes, there is technically a chain of logic there — Prologis is the largest owner of logistics warehouses in the world, at least among REITs, and Amazon is a substantial client of theirs, and in the bigger picture Amazon traffic drives some of the demand for warehouse and logistics space in general, making it more valuable and keeping rents relatively high.
But, of course, even though yes, Prologis does pay out dividends, there’s no way to just “enroll” and start receiving checks, whether they be from Amazon or from ProLogis. If you buy shares of Prologis, you will receive dividends each quarter… and those dividends will probably rise over time, though the pace of dividend increases has been pretty slow in recent years.
Right now, Prologis pays a 58-cent dividend every quarter, roughly 10% higher than the dividend they paid for the previous year. At that pace, you’re earning $2.32 per year, so at the current share price of $100 (it was $66 when Ryle first teased this a couple years ago, though the dividend was lower), you would be earning dividend income of about 2.3%. Which sounds somewhat respectable in a low-yield world but is far from life-chagning (it has sometimes dropped to near 2% when enthusiasm for the stock was higher, and gone well above 4% a few times when the shares got clobbered because of interest rate fears or market downturns — if you bought near the bottom at $65 or so in late March, the last time we updated this story, it would have offered a 3.7% yield).
That means you get quite a lot more from ProLogis than you would by buying a 10-year Treasury Note right now — though the U.S. Treasury will guarantee that you get your principal back at the end of ten years, and the price of Prologis shares ten years from now is neither guaranteed nor knowable (on the other side, Prologis will probably keep increasing the dividend each year, so it’s much more likely to keep up with inflation than is the coupon on a Treasury Note, which never changes).
The stock has generally trended up over time, accelerating last year as interest rates fell again, but has certainly had bad times as well — including the full-on real estate collapse of 2008 (PLD hit about $66 a share in 2007, then fell to the teens in the crisis and it took almost ten years for the shares to get back into the $60s), and, of course, like many stocks it was down 35% or so in the March collapse before bouncing back.
And yes, Prologis did start increasing the dividend a few years ago, and has now hiked it eight times since then, though they also cut the dividend almost in half in 2009, and they paid a flat dividend from then through 2013. The dividend for this quarter is still 58 cents, and the stock traded ex-dividend (which means “without the rights to the dividend”) on September 16, which was yesterday, so you won’t get the next one if you buy now. Of course, it may not make any real difference in any given quarter — that dividend is 58 cents per share, and PLD shares often move up or down by more than that amount in a given day (or 10X that amount, lately), so being lucky or skilled in your entry point is at least as important as “capturing” the dividend for any given quarter.
If you’re checking the rest of those clues, yes, Prologis did increase the dividend by 71% from 2014 to 2018, which matches what’s still in the teaser pitch, and bring that up to 90%+ growth as of this year. And the total number of $1.5 billion for “cash paid out to everyday people” does come pretty close to the total dividends Prologis paid over the past year (roughly $1.44 billion as of March).
Connecting that $1.5 billion directly to Amazon, though, is a little silly — Amazon is their largest client, but as of the 2017 10-K it only accounted for 4.9% of the Net Effective Rent that Prologis collects. If we extrapolate and say that Amazon probably still accounts for about 5% of revenue at Prologis, that would mean that Prologis gets a check from Amazon every year of about $127 million (that’s probably not true, but it’s not likely to be all that far off)… and if you assume that 30-40% of revenue turns into dividends, as has mostly been the case for Prologis over the years, then maybe $50 million from Amazon very indirectly makes its way to Prologis shareholders in a given year. I didn’t update that for recent numbers, but it’s probably not wildly different.
Put another way, there are about 740 million shares outstanding for Prologis, so that means about well under ten cents of the $2.32 annual dividend for PLD shareholders might feasibly be sourced back to Amazon.
As is often the case with REITs, particularly during times of relatively steady interest rates, when the dividend rose the stock followed suit in rough but clear fashion, rising 79% in the six years that the dividend per share rose by 71%… so yes, dividend growth is crucial, and is perhaps the most important criteria to look at when trying to find REITS that can outperform over the long run.
So what’s the forecast for Prologis? Well, they’re not likely to accelerate or have huge growth — they’re very big already, with a market cap of nearly $70 billion, and that kind of growth in these space-intensive operations requires a lot of capital for building newer and more advanced logistics centers, many of which are essentially “build to suit” operations for their big clients (yes, like Amazon)… but they are clearly the global leader in this space, and they should be more stable than the smaller upstarts.
ProLogis in its presentation materials in recent years has led investors to expect 10-11% as an average annual return, with 3% coming from the dividend and the other 7-8% from growth in FFO… that’s a little hinky to get your head around, since FFO is essentially a cash flow measure, and dividends come out of cash flow, so unless they’re talking about 7-8% in retained FFO after dividends it’s hard to add those together with a straight face. But still, that’s a pretty reasonable target for investors to keep in mind: if you invest in ProLogis today, an effective annual return of about 10% is definitely not a conservative assumption, but it’s probably reasonable to pencil into your future expectations… maybe a little more, if you reinvest that dividend and let it compound, or if interest rates drop into the negative (since those reinvested dividends gradually add more shares to your pile, which means you’ll own more shares and will earn dividends on those additional shares in the future as well — dividend compounding can become very dramatic if you let it run for a long time and the company increases the dividend each year).
What’s driving that? Well, partly it’s that e-commerce requires a lot more “logistics space” to generate the same amount of sales than do the distributors for brick and mortar stores. Prologis says it’s roughly a 3X multiple — brick and mortar retail is three times as productive on a per-square-foot basis when it comes to logistics space, mostly because they’re moving around big pallets of stuff instead of individual packages for end users… which means that as more sales go online and require more efficient fulfillment, the demand for logistics/warehouse space should accelerate, and the older distribution centers that were built for the Wal-Mart era can’t be instantly transitioned to become e-commerce fulfillment centers (though Prologis has been around for longer than e-commerce has been a meaningful segment, and plenty of their warehouse and logistics space is “business to business” warehousing and distribution, not the new wave of robotic and hyper-efficient distribution centers used by e-commerce giants).
There’s a lot of competition in logistics real estate — ProLogis is not the only one to notice the boom in demand for this kind of space, so there may even be a “bubble” in the buildout of this kind of industrial space, particularly in the lower cost areas… ProLogis says the cap rate is coming down pretty steadily even as market rents have globally, on average, failed to keep up with inflation over the past 20 years — which means that people are paying more for these buildings even though they’re not able to raise rents enough to keep up with inflation.
“Cap rate” is just a term that real estate investors use for the cash return of a building — it ignores depreciation and essentially represents the cash return you would get after the regular maintenance and other ongoing cash costs, and expresses that as a percentage of the purchase price. Acording to ProLogis, the cap rate on their kinds of buildings has recently been under 5.5% (pre-coronavirus), which is as low as it has been in more than 20 years (the last peak was in 2009 at 8%, not because the rents rose but because the prices of the buildings dropped in a seller’s market). Interest rate has a huge influence on cap rates, since most people borrow to buy buildings, so cap rates in most sectors have fallen over the past 20 years as interest rates dropped and more institutional money has surged into real estate as an asset class — so that’s not necessarily shocking, but it does call attention to the fact that returns on real estate should be expected to be relatively low because the prices of those buildings are relatively high.
ProLogis in 2017 bought one of their substantial competitors, DCT, and they use less leverage than a lot of their competitors (debt is about 25% of their market cap), and as the largest player in the space (by far) they usually have easy access to liquidity if they want to grow, which makes them relatively resilient (they have more cash and credit available than they need to finish projects that are currently in the development pipeline and pay off any debt that matures in the next two years)… though it also means that each new building they buy or build has a minimal effect on the bottom line.
There are other appealing industrial REITs out there, and they’re all smaller than ProLogis so have more potential to grow sharply if they do something right or make a few good acquisitions or are concentrated in the best markets… but it’s hard to argue with Prologis’ dominance. There’s actually also an ETF that focuses on industrial real estate and includes many of these names, that’s the Pacer Benchmark Industrial Real Estate ETF (INDS), and Prologis is the largest holding there (Duke Realty (DRE), which is the only large player whose financials are pretty similar to Prologis, is also a large holding), but it also includes the self-storage REITs as well as some of the industrial real estate owners who don’t really focus on “warehouse and distribution” space (like the oddball Innovative Industrial Properties (IIPR), which I happen to own and which leases space to indoor marijuana growers)… and it’s pretty expensive for an ETF, with an expense ratio of 0.6%, you can see the details here if you’re curious.
So no, this isn’t a way to force Amazon to give you cash, not really, but Amazon is certainly part of the story — Amazon is ProLogis’ largest customer, but ProLogis has a very diversified customer base and e-commerce companies in total only account for about 10% of Prologis’ portfolio of properties. It’s an appealing company in some ways, and it has certainly been right on the trend in their business since they began to shift over to focusing on the capability for “last mile” distribution near coastal cities as a result of their (failed) work with Webvan in the late 1990s, and it’s easier to buy Prologis than to try to figure out which of the other possibles like Rexford (REXR) or EastGroup (EGP) or whoever has the best geographic concentration in desirable urban areas — though it’s also quite possible that those little sub-$5 billion industrial REITs have more growth potential just because of their smaller size, or that they could be acquired by Duke or Prologis or otherwise get rolled up by other ambitious companies as they continue to push for national dominance.
A long one today, eh? I won’t try to talk you out of buying Prologis, particularly when it takes a haircut with market volatility (as with most stocks, buying it in late March would have been brilliant… so far), but just keep in mind that it’s the bluest of the blue chips in this space, and you pay for that — so the dividend is still relatively low compared to others, and is growing at a decent but not blistering pace… which might mean that if interest rates rise, Prologis becomes less appealing to income investors if they can’t keep lifting that payout and don’t have the same top-line growth potential as the smaller players (on the other hand, Wall Street is clearly betting now that interest rates will never, ever rise again). Prologis and Duke have done a bit worse than many of their smaller peers in recent years, and that could continue — but they also bounced back better than most after the March collapse, and odds are pretty good that they’ll continue to be more resilient if the market has more ugly days. And if you’re expecting 10% a year, well, the stock returned 19% in the last year, mostly because of changing interest rate expectations, but interest rates can’t get a lot lower than they are — the last time interest rate increases seemed to be an issue, about two years ago, PLD shareholders would have enjoyed a total return of about 12% (that would be June 2017-June 2018).
And yes, I do usually like to close these “income” promises with a little math — so what would it take to get that $48,000 “Prime Profit” payout? The tease implied that this is the kind of income that might be possible on an annual basis, so we just have to divide that by the current annualized dividend of $2.32, and we learn that to make $48,000 in “prime profits” we’d have to own 20,689 shares. At $100 a share today, buying 20,689 shares would cost you a little over $2 million.
I hope some of you can swing that, and certainly some of the insiders have accumulated that many shares, but it’s not terribly feasible as a short-term target for very many of you… or, indeed, for very many people who are tempted by hype-filled ads for $99 newsletters.
If, as Prologis hopes, they can compound at 11% a year, and if that can be done in perpetuity without the returns falling and without any big drawdowns along the way, which is a fanciful notion to say the least, then an investment of $25,000 today (which is still a lot, but more in the realm of possibility for most newsletter subscribers) might perhaps turn into about $2 million eventually, and maybe at that point it will yield $48,000 or more a year in income… but it could easily take 40 years of compounding to get there.
In the meantime, count on something like a 2.5% dividend from these prices, growing a little bit each year, which would mean that if you invested $25,000 in buying Prologis shares today, your quarterly “Prime Profits” check would be… about $157 (before taxes).
Not terrible, not a crazy idea… just not what the ad wanted us to believe it would be. What a surprise.
Have any thoughts on Prologis or their competitors? Favorite REITs in this space or others? Let us know with a comment below… We’ve kept the original comments from this article appended so you can see a couple years of reader reactions to this story, but we’d love to hear more current thoughts from readers as well. Thanks for reading!
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Disclosure: I own shares of Amazon, Shopify and Innovative Industrial Properties, all mentioned above. I don’t own any other stock covered, and won’t trade in any covered stock for at least three days, per Stock Gumshoe’s rules.