The past four years have been some of the strongest in the industrial real estate market's history. Consistent increases in demand, as well as lease rates increasing at a higher rate than the consumer price index (CPI), have made industrial real estate investment trusts (REITs) a favorite among investors.
CBRE's 2020 Real Estate Market Outlook report shows promise that this market will continue to perform well, as they're seeing higher than normal renewal rates and forecast rental growth to be around 5%.
There are two industrial REITs that are likely to grow at a much faster pace than the rest of the industrial market, however. Innovative Industrial Properties (NYSE: IIPR) and Americold Realty Trust (NYSE: COLD) are both serving industries that are expected to grow exponentially over the next few years.
But which one is the better buy? We're going to take a close look at each of them to find out.
Innovative Industrial Properties
Innovative Industrial Properties invests in industrial real estate that's specific to medical cannabis facility operators. Their tenants are experienced, licensed, and state regulated. The company was founded in 2016 and elected to be taxed as a REIT at the end of 2017.
While young, this REIT has been good to its shareholders, with significant growth each year. While they've already grown their portfolio to an impressive size of 51 properties with 3.2 million rentable square feet of space, it looks like they're just getting started.
They currently hold investments in 15 out of the 33 states that have legalized the use of marijuana, either for medical purposes or recreationally. While they already have plenty of room to continue growing across the other 18 states, it's very likely that more states will have new laws allowing the use of medical marijuana by the end of 2020. Three states will leave it to voters on the November ballot, and eight others have bills currently working their way through their House and Senate.
The cannabis industry has already reached $10 billion in regulated sales as of 2018, and that number is expected to grow to over $30 billion by 2023. Whether it hits that mark or not, it's clear that this industry is going to see growth at an increasing rate.
Is IIPR a good buy? For risk-tolerant investors, I think it is. In addition to the usual risks that come along with REIT investments, Innovative has some unique risks that have to do with changing regulations and the availability of financing for medical cannabis businesses. However, I don't think any of these risks alone will have too large of an impact on their overall portfolio.
I think this REIT will make investors a lot of money over the next three to five years. And if it does grow as much as I think it will in that time, it should also be one worth holding onto long term.
Americold Realty Trust
Americold is the only publicly traded REIT that specializes in temperature-controlled warehouses and is the second-largest owner of temperature-controlled storage real estate in the U.S. Americold has 160 temperature-controlled facilities strategically positioned throughout the U.S., as well as a total of 18 others in countries including Canada, Australia, New Zealand, and Argentina.
Americold has a 27% market share in the United States, which makes them highly competitive since their customers can utilize the large network of warehouses to keep products close to their end users. They currently have 1.1 billion cubic feet of storage capacity across 45 million square feet of space.
Americold provides cold storage for some of the largest food producers, distributors, and retailers. They also provide fulfillment for e-commerce stores selling frozen, refrigerated, and perishable food items.
Their top 25 customers have been with them for an average of over 30 years, and these top customers include 13 investment-grade companies. This strong and well-established customer base suggests that Americold should have a lot of stability in terms of revenue.
The temperature-controlled storage industry is expected to see significant growth over the next few years with the increase in e-commerce sales of refrigerated meals and groceries. This trend has likely increased even more with the number of people who started utilizing these types of services while they had stay-at-home orders due to the coronavirus pandemic.
To meet this increasing demand, Americold has three new locations and two expansions under construction as of the first quarter of 2020. They also have an estimated $1 billion of investments in expansions and new developments in their pipeline.
In January, 2020, Americold completed the acquisition of both Nova Cold Logistics in Canada and Newport Cold Storage in St Paul Minnesota.
The biggest risk I see is Americold's dependency on the cold-storage industry meeting growth expectations. Underutilized temperature-controlled storage can quickly eat into a property's net operating income with the significant expenses in labor and utility costs to maintain the required climate in the warehouse.
Additionally, their impressive customer base could be a double-edged sword if any of them choose to develop and maintain their own warehouses, much like Amazon (NASDAQ: AMZN) cut out some of their distribution partners.
Is Americold a good buy? In my opinion, the company's growth prospects are attractive enough to outweigh the risks they face. As they grow their market share in the U.S., their global presence is likely to grow with it.
Which is the better buy?
Despite its lower dividend yield, I have to go with Americold Realty Trust. Both REITs have a lot of growth potential over the next few years and should do quite well, but as Americold increases its U.S. market share, it's likely to expand its global network as well. With its current share price, I see a lot of room for growth, especially since their growing portfolio will help them realize economies of scale to reduce their operating expenses and further increase their funds from operations (FFO).
Both REITs come with some additional risk, as they're likely to experience some growing pains over the next few years, but the reward should be plentiful as long as their management teams are prepared to work through them.