Industrial real estate has been the leading sector in commercial real estate over the past few years and has done exceptionally well this year despite challenging economic conditions. Industrial real estate investment trusts (REITs) are a great way for investors to capitalize on the present opportunity in this sector. Below are three industrial REITs that stand out in the marketplace right now and could be good buys this December.
What makes an industrial REIT a good buy?
There are several factors that come into play when evaluating a REIT. The quality of tenants, length of leases, facility locations, supply and demand of the subsector, growth prospects, and company financials all come into play. Funds from operation (FFO), payout ratios, and debt to earnings before taxes, income, depreciation, and appreciation (EBITDA) are good indicators of the health of the company's balance sheet.
Self storage, data centers, logistics, and warehouses all fall under the larger industrial umbrella, but industrial REITs serving the e-commerce market are seeing exceptional performance and growth opportunities currently. E-commerce made up 14.3% of all retail sales in Q3 2020 -- the second highest percentage rate ever, with e-commerce sales reaching an estimated $476 million by 2023, roughly $100 million more than e-commerce sales today. With demand outpacing supply in several markets, industrial real estate has room for continued growth, providing investors with somewhat of a safety net in an uncertain market. EastGroup Properties (NYSE: EGP), Monmouth Real Estate Investment Corp. (NYSE: MNR), and Duke Realty Corp. (NYSE: DRE) check most, if not all, of the boxes, and based on current activity and share prices, they offer value with growth potential.
EastGroup Properties specializes in multi-tenant business distribution buildings, which provide a mix of warehouse and office space ranging from 60,000 to 125,000 square feet. This business model allows the company to serve mid-sized businesses that operate in high-growth, top-tier markets instead of relying on large investment-grade tenants like the other two REITs discussed here. EastGroup Properties currently owns and manages 46 million square feet of industrial space in nine states, with emphasis on high-growth markets in the sunbelt region and California.
Development has been a large part of its growth over the past 20 years, making up roughly 41% of their portfolio today. Currently it has 13 projects underway, which will add 2.2 million square feet to its portfolio in addition to several value-add projects.
Net income and FFO increased year over year, and tenant occupancy reached 96.4% at the end of Q3 2020, with lease rates of 97.8% and rental rates having increased 28% on average. The company had $395 million available in cash and credit facility, with a debt-to-EBITA ratio of 4.88x, which is below average among equity REITs. Its current payout ratio of 58% is conservative by REIT standards and allows plenty of room to maintain any pullback in the marketplace or the possibility of increased dividends in the future. Share prices have rebounded from March lows, giving investors just over a 2% return. The dividend return isn't exactly stellar compared to other REITs, but the quality of its portfolio and consistent performance over time makes this a worthwhile buy.
Duke Realty Corp
Duke Realty Corporation owns, develops, and manages 526 warehouses and distribution facilities, adding up to 159 million rentable square feet in 20 major metros across the United States. Duke Realty Corp. focuses on delivering industrial space for the e-commerce marketplace, with big-name tenants including Amazon (NASDAQ: AMZ), UPS (NYSE: UPS), Wayfair (NYSE: W), Home Depot (NYSE: HD), and more.
Duke Realty saw an increase in FFOs, net income, and occupancy in Q3 2020 when compared one year prior. It has 7.0 million square feet in development currently, which, including existing facilities, is 95.6% leased. The company is in a strong financial position with a moderate debt-to-EBITDA of 5.0x and $1.2 billion in cash and credit facility. The company recently increased its quarterly dividends, providing a payout ratio around 64% and a return of 2.7%. The dividend yield isn't exactly overwhelming when compared to other REIT returns, but its high- quality portfolio, investment-grade tenants, great credit rating, and solid financial standing makes it a worthwhile investment in the long run.
Monmouth Real Estate Investment Corp.
Monmouth Real Estate Investment Corp. is one of the oldest equity REITs in the industry that, like Duke Realty, specializes in serving the e-commerce market with logistics warehouses and distribution centers to single tenants through long term net-leases. Monmouth currently owns or manages 119 facilities, or 23.4 million rentable square feet, across 31 states with investment-grade tenants like Anheuser-Busch (NYSE: BUD), Coca-Cola (NYSE: KO), FedEx (NYSE: FDX), and Kellogg’s (NYSE: K), among others. Beyond a top-notch real estate portfolio with roughly 81% of revenues earned from high-quality tenants, Monmouth has maintained a 99.4% occupancy rate since the start of the pandemic and 99.9% rent collection in the month of November 2020. Adjusted funds from operations (AFFO) are down slightly for the company when compared to the same quarter a year prior despite revenues increasing steadily, a roughly 17% increase year over year for the past five years.
The company has a debt-to-EBITDA ratio of 6.0x with $225 million in cash and cash equivalents as of November 2020, which isn't great, but it isn't out of line for normal debt ratios among equity REITs. The company is working on two new acquisitions currently that would add 2.4 million square feet to its portfolio and have an averaged weight debt maturity of 11.1 years. Share prices have rebounded back to pre-coronavirus highs, providing investors with a 4.5% return while maintaining a payout ratio of 89%.
Worthy buys in a dominating sector
All three stocks are worthy buys this month, servicing different markets, tenants, and industrial demands. The holiday season should give all three companies a nice boost in revenues and solidify the current trend in e-commerce demand. As with any stock or REIT, patience is key. Look at these investments for long-term growth that could face some volatility over the next few years. Oversupply is an inherent risk in a high-demand sector. Self-storage recently battled oversupply after a decades worth of growth -- an obstacle industrial real estate, particularly warehouse, distribution, and logistics centers, could also face.