The global coronavirus pandemic has led to increased demand for industrial real estate, partially driven by the shift toward online shopping. But there's more to understand in this sector than that. If you're thinking of getting in on the trend, here are three ways to play it that might be of interest to you: Prologis (NYSE: PLD), STAG Industrial (NYSE: STAG), and Innovative Industrial Properties (NYSE: IIPR).
1. The giant
When you look at the industrial sector, there will be one name that stands above the rest: $78 billion market cap Prologis. Just being large doesn't mean a real estate investment trust (REIT) is better than another option, but Prologis didn't get to this size by accident. It's a very well-run company that has long focused on owning the best industrial properties around the world in the best locations (largely near key transportation hubs and population centers).
The truth is that 2020 was actually a pretty good year for the REIT, with core funds from operations (FFO) rising to $3.80 a share from $3.31 in 2019. The key is that this performance was achieved at a time when some other REITs were struggling to deal with the impact of the pandemic (think retail and healthcare REITs). Which is pretty exciting, given that the REIT reset its dividend lower during the 2007 to 2009 financial crisis but doesn't appear to be at risk of repeating that because of the coronavirus-driven recession in 2020. Indeed, the REIT's FFO payout ratio is comfortably in the 60% range.
The problem here is that investors are aware of how well-run Prologis is, and the REIT is not cheap. It's price to FFO ratio is around 27 times, and the yield is a modest 2.25%. But if you're willing to pay up for the best names in the industry, Prologis has to be on your list, noting that management expects another strong year in 2021.
2. A little out of the way
The next name up, STAG Industrial, is kind of the opposite of Prologis in many ways. This industrial REIT specifically focuses on second-tier markets where competition for assets isn't quite as fierce. Management believes this gives it a leg up on the competition, which is often private investors and not other REITs. It's also a much smaller company, with a market cap of around $4.6 billion. The 4.8% dividend yield and monthly pay dividend are other favorable attributes.
The most notable thing for STAG is that it expects the follow-on effects from the coronavirus pandemic to be very good for its business. For example, going into 2020, same-store net operating income growth averaged around 1% a year, but management expects that to pick up to between 2% and 3% over the next five years. Acquisition volume averaged around $675 million before the pandemic but is projected to increase to between $800 million and $1 billion. And it expects to be able to maintain its investment grade balance sheet, as well, despite the ramp-up in growth spending. The best part of this is that the relatively young REIT has proven it can handle severe adversity, given that it has now lived through a major recession.
There's probably more risk involved here because of the second-tier regions in which STAG operates, but the higher yield is compensating investors for that. And while the company's around 80% FFO payout ratio in the third quarter is high relative to Prologis, it isn't outlandish. For dividend investors looking to maximize their income stream, STAG is an industrial REIT worth a very close look in today's low-yield world.
3. The specialist
Although Innovative Industrial Properties' name is pretty bland, it's an interesting way to play a headline-grabbing long-term trend -- the legalization of marijuana. The relatively young REIT (it IPOed in 2016) owns 67 marijuana-related facilities. The vast majority of its portfolio is made up of hydroponic grow houses, but it also owns some processing and distribution properties.
The key here is that Innovative Industrial is more than just a landlord; it's a vital source of funding for marijuana companies. Because of the still-hazy legal issues surrounding the pot industry, it can be hard for companies to find lenders. Innovative has stepped in to fill the void, effectively buying vital assets from growers and then instantly leasing them back under long-term contracts. This has led to strong growth, most notably on the dividend front, where the distribution has increased from $0.15 per share per quarter to $1.24 per share per quarter in just four years.
Although those types of dividend increases aren't likely to continue, so long as Innovative Industrial provides the industry a valuable source of capital, the REIT and its dividend are likely to keep growing fairly strongly. That said, investors are aware of the success the REIT has seen, as it offers a modest 2.6% yield. However, for dividend growth investors, paying up here might be worth it.
An in-demand sector
At the end of the day, the industrial REIT sector is fairly "hot" today, so investors shouldn't go in expecting to find bargains. That said, if you are looking at the space, then this trio of names should offer a strong, diversified launch pad. Prologis is the industry giant and should be a starting point for every investor, even if you decide not to buy it. STAG offers a relatively generous yield and a notably different approach to the space. And Innovative Industrial is a unique way to play what should be a big, long-term trend.