First Industrial Realty Trust (NYSE: FR) and STAG Industrial (NYSE: STAG) are both real estate investment trusts (REITs) focused on owning industrial real estate. However, they have quite differentiated business models. Because of that, they'll likely appeal to different investors.
Here's a closer look at how to determine which of these industrial REITs might be the better buy depending on an investor’s preference.
The case for buying First Industrial Realty Trust
First Industrial currently owns and operates 436 industrial buildings with 64.4 million square feet of space leased to 978 customers. The company focuses on bulk and regional distribution centers and other logistics properties that help meet customers' supply-chain needs.
Demand for logistics properties is growing at a brisk pace. The pandemic accelerated an already strong market for these properties by quickening the shift to e-commerce while also boosting demand for space to prevent future supply-chain disruptions. That's enabling First Industrial to benefit from high occupancy levels and strong rent growth, allowing it to launch new development projects. The company started five new projects already this year. It also purchased more land to set the stage for future growth.
Because demand for logistics-focused industrial properties is red-hot these days, First Industrial's stock has a relatively rich valuation. Shares currently trade at about 25 times funds from operations (FFO) and a 4% premium to its net asset value (NAV). Because of that premium value, it has a lower-yielding dividend. At around 2.1%, it's below the REIT sector average of more than 3%. However, the REIT is growing that payout at a healthy rate, including giving its investors an 8% raise earlier this year.
The case for buying STAG Industrial
STAG Industrial currently owns 494 single-tenant industrial buildings with 99.1 million square feet of space. However, instead of solely focusing on warehouse and distribution properties like First Industrial, STAG is active across the entire industrial real estate market, including owning light manufacturing properties and flex/office space. It's a much larger overall market at an estimated $1 trillion of properties in the U.S. alone. With just a 0.5% share of that market, STAG has lots of room to grow.
Another difference is that STAG primarily grows via acquisition. It targets buying $800 million to $1.2 billion of properties per year. While it will invest in select development projects, it primarily focuses on acquiring value-add opportunities that allow it to create value through leasing and redevelopment.
Because of its diversification and acquisition-focused growth strategy, investors aren't willing to pay as high a premium for its stock. STAG currently trades at around 18.4 times its FFO, well below its peer group average of 30.9 times. Because of that, it has a much higher dividend yield (currently 4%) that it grows at a slower pace. Further, it pays its dividend monthly, making it even more attractive to income-seeking investors.
It comes down to growth vs. income
While First Industrial and STAG Industrial both own industrial properties, they have different business models. Because of that, some investors will prefer one REIT over the other. First Industrial is benefiting from strong demand for logistics properties, which should drive above-average FFO and dividend growth in the coming years as it develops new warehouses. On the other hand, STAG Industrial focuses on acquiring a wide range of cash-flowing industrial real estate to support its above-average monthly dividend.
Given these differences, First Industrial is the better option for those willing to take on more risk in the hope of earning higher total returns. Meanwhile, STAG Industrial is a solid play for those seeking income.