Industrial Real Estate Stocks
In days of yore, industrial real estate was a worthy asset class in the property world, but always something of a prosaic cousin to the more-glamorous office, hospitality or retail sectors.
Trade publications and business media breathlessly reported on trophy office acquisitions, eye-dazzling new malls, or when a grand hotel exchanged hands. Green “mixed-use” or transportation-oriented projects were feted.
Industrial property, well, occupied the back of the book.
Times, and property values, have definitely changed. Like nerds turned titans in tech industries, the industrial-warehouse sector has won marque billing by its increasingly vital role in the modern marketplace.
The short story is consumers, builders and retailers want product, and they often want goods on a same-day basis, unless they are willing to wait overnight.
Not only that, e-commerce has gone mainstream, with roughly 13% of retail sales in 2021 talking place online—with a result that usually translates into a home or office delivery, in onesies and twosies. To get product to consumers quickly, warehouses have to be located reasonably near or in major metropolitan centers.
More and more automation is entering the warehouse business, with robots searching by barcode, and packages being routed on conveyor belts for offloading into trucks. The word “logistics” is bandied about more today, rather than “warehousing.”
The upshot?
Put it this way: By the 2020s, warehouse properties in Southern California could sell for more than $350 a square foot, a price range until recently associated with office buildings and condos.
For example, the publicly traded Rexford Industrial (REXR) real estate investment trust (REIT) in early 2022 announced it had purchased a 65,605-square-foot warehouse facility in Irwindale, east of Los Angeles, for $352 a square foot.
Rexford Industrial has been on a tear in Wall Street since going public in 2013, rising more than 400% in the nine-year frame. And, the stock paid dividends along the way.
So for investors, the performance of Rexford Industrial naturally raises the question: What are industrial REITs and are they a good buy?
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The Industrial REIT
In general, publicly traded REITS—
—Invest at least 75% of assets in real estate, cash, or US Treasuries
—Derive at least 75% of gross income from rents, interest oo mortgages that finance real property, or real estate sales
—Pay a minimum of 90% of taxable income out in shareholder dividends every year.
The Largest Industrial REIT
Prologis (PLD)
The scale of Prologis, a behemoth among REITs, is something usually associated with national governments. Prologis, the largest private industrial property enterprise on the planet, has nearly 1 billion (yes, with a “b”) square feet under management, in roughly 5,000 buildings worldwide—in 19 nations, altogether. The Prologis main formula is simple enough: Buy warehouses near major cities, where land is scarce.
Wall Street has loved Prologis in recent years, with share prices quadrupling since 2017, and the REIT reaching market cap of about $116 billion.
There may another leg to the Prologis story, as the world continues to evolve to online commerce and rapid delivery. Investors can clip a modest 1.6% dividend while waiting to find out.
Almost all companies in real estate are leveraged and Prologis is no exception. Higher interest rates could reduce Prologis’ net asset values, and boost borrowing costs, both negatives. Also, investors compare REITs against bonds for yield—so the higher bond yields rise, the relatively less attractive is a REIT stock like Prologis.
But the company in late 2021 was given an investment-grade “A-” credit-rating from S&P Global, meaning the risk of default is slight, and the company is not considered over-leveraged—indeed Prologis’ credit-rating is a not or two higher than most industrial REITs.
Nothing is guaranteed in investing, but Prologis appears to be a safe place to warehouse savings.
What About American Tower?
As large as Prologis is, on any particular day another industrial REIT, American Tower (AMT) may have a larger market-cap.
If you have used a cell- or smartphone, in a minute way you have probably funneled money into the American Tower empire.
That’s right, American Tower owns the ubiquitous cellphone towers and related property and infrastructure seen globally, with a portfolio of approximately 219,000 communications sites, on more than 43,000 properties in North America and more than 175,000 properties globally.
American Tower has a market cap of about $114 billion, and company share prices are up 150% on Wall Street in the last five years. The company pays 2.2% dividend.
American Tower is a bit more leveraged up than Prologis, and the credit-rating agencies have furrowed their eyebrows. S&P Global gave American Tower a “BBB-” credit-rating in mid-2021. That is “investment grade” by the slimmest of margins, and any reduction in the credit-rating would push American Tower into the “non-investment grade” territory.
As international operations, both Prologis and American Tower could report lower earnings (in US dollars) if the greenback appreciates, and there is always a degree of regulatory or political risk in offshore business climates.
Both companies have heavy analyst coverage, which gives comfort that a major blowout of some type is less likely to be unforeseen.
But that same comfort means both industrial giants are fully priced on Wall Street.
The Other, Largest Industrial REITs
There are a number of large industrial REITs, a tribute to the strength of the sector and investor receptivity.
Crown Castle REIT (CCI)
A cousin to American Tower, Crown Castle’s portfolio include more than 40,000 cell towers, an additional 80,000 on-air or under-contract small cell nodes, and about 80,000 miles of fiber-optics, but all based in the US.
Sporting a market cap of $77.9 billion, Crown Castle received a “BBB-“ rating from Fitch in late 2021, a good enough rating but toward to lower end of the investment-grade totem pole.
Investors do clip a 3.3% dividend, a larger yield than many of the largest industrial REITs.
Crown Castle also operates exclusively in the US, and so does not have the currency-risk of Prologis or American Tower.
Public Storage (PSA)
Most investors understand Public Storage, the self-storage company that rents “garage space” to homeowners and others needing a secure location to squirrel away some goods.
The REIT owns some 2,500 self-storage facilities across the US, serving one million customers, and has a market capitalization of $63.6 billion.
Moody’s gave Public Storage an “A2” rating 2021, so the storage colossus is not regarded as over-leveraged. Like Crown Castle, Public Storage is US-based, eliminating currency risks.
Public Storage shares are up 66% in the last five years, and the stock pays a 2.2% dividend. It is hard to imagine anything going wrong with the Public Storage business model, though the company is concentrated in regulation-happy California.
Digital Realty (DLR)
Digital Realty owns and operates 280 data centers and related facilities and services in 25 different countries, a portfolio upon which Wall Street puts a market capitalization of $41.2 billion.
For investors who like dividends, Digital Realty offer a 3.2% yield, and 16 straight years of dividend increases.
Digital Realty shares are up a so-so 35.4% in the last five years, and in early 2022 credit-rating agency Fitch affirmed its “BBB” rating on the data-center titan, which is an investment grade, but obviously not in the “A” range.
On the positive side, Digital Realty operates in a tech-centric corner of the commercial world projected to exhibit strong growth for years yet to come. For dividend-clippers, this REIT may beckon.
However, the tech industries are hotly competitive, and eat money in the form of constant capital improvements. Competition is wonderful for consumers—but perhaps not so great for shareholders.
Duke Realty (DRE)
Duke Realty is a domestic only, pure-play logistics property REIT, with about 160 million of square feet in the portfolio, in 19 US markets.
Duke Realty shares are up about 128% in the last five years, and the REIT has a market capitalization of $22 billion. The REIT pays a 1.9% dividend.
Duke Realty earned a “BBB+” credit-rating from S&P in early 2022, and the outlook was raised from “stable” to “positive.” Duke Realty’s leverage is under control.
For investors uncomfortable with currency risks and foreign exposure, or high-tech wizardry, and who are looking for basic, logistics-oriented industrial REIT, Duke Realty may be the answer.
Some Other Industrial REITS
Other smaller industrial REITs may offer diversification to the investor’s portfolio, by product type or geography. By mix-and-matching, investors can broaden their exposure to property types.
Americold Realty (COLD). Operates cold-storage warehouses.
Stag Industrial (STAG) Diversifed industrial REIT.
3. PS Business Parks (PSB), Business-light industrial parks.
4. Monmouth Real Estate Investment (MNR) Industrial REIT.
5. Plymouth Industrial (PLYM) Industrial REIT
6. Industrial Logistics Properties Trust (ILPT) Logistics properties
7. Terreno Realty (TRNO) Industrial REIT
8. EastGroup Properties (EGP). Sunbelt industrial.
9. First Industrial (FP) Industrial REIT
10. Life Storage (LSI) Self-storage REIT
Conclusion
There are but a few ways for even high net-worth investors to reasonably acquire commercial real estate, and REITs are one of them.
The great advantage of REITs is liquidity, and then also some measure of diversity. The big public REITs, as seen above, generally own dozens if not hundreds of properties, thus reducing the risk of exposure to any particular discrete asset.
Some REITs invest broadly, but most REITs focus on a geography or asset class, thus somewhat leaving it up to the investor to obtain a truly diverse portfolio, usually by mix-and-matching several REITs.
There are industrial REITs, but also REITs devoted to offices, hospitality, retail, medical, manufactured housing, multifamily (apartments), and even the single-family detached market, along with some specialty REITs.
By the way, the concept of a REIT has been legalized in several nations, to serve investors seeking international exposure.
There are some possible drawbacks to REITs, industrial or otherwise, from the investors’ perspective.
One is that investors “pay a premium” for the liquidity of a REIT. In general, that means REIT shareholders pay a higher value per share in exchange for the ability to sell the share on a moment’s notice. REITs tend to be richly priced, and trade very near or even above net asset values (the value of property minus liabilities). Room for appreciation on such large portfolios is limited.
A second possible shortcoming is in the alignment of investor and management interests. Public REITs are huge enterprises, with well-compensated management and increasingly onerous expectations by stakeholders and politicians regarding corporate obligations, sometimes known as “ESG”, or environment, social and governance. While these goals may be worthy, the bottom line can be undercut.
In contrast, investors in typical real-estate syndications are taking a financial position alongside the sponsors and management, all of whom want a successful exit and payday in the three-to-seven year window. Investors who stay for the payday are compensated for the lack of liquidity along the way.
There is a much greater chance for a large amount of appreciation in, say, a real estate syndication of an office or apartment complex to be upgraded and repositioned, than in a large publicly traded REIT.
That said, both REITs and real estate syndications may be right for any particular investor, depending on liquify needs and financial goals.
POSTED BY
CHRIS RISING
Chris Rising manages the day-to-day business activities of Rising, while also serving on its Investment Committee.
He received his J.D. Law, Real Estate from Loyola Law School and his B.A. in History and Political Science from Duke University.
