I have owned real estate investment trusts (REITs) for more than a decade. I'm quite pleased with their overall performance, as most of my REIT investments have produced attractive total returns.
However, I could have done even better if I had bought some of the highest-performing REITs. One REIT I should've bought and held a decade ago is First Industrial (NYSE: FR). The industrial REIT has generated a more than 19% total annualized return over the past 10 years, well above the S&P 500's 15.3% total return during that time frame.
I gave up way too early
I would have loved to have owned any of the top-performing REITs over the last decade. However, I can't fault myself for not buying them 10 years ago because I don't remember coming across them at the time.
However, I can say I should have purchased First Industrial a decade ago because I knew it well. I owned a few shares until the middle of 2010 when I exited my position at a loss due to the financial crisis' impact on industrial real estate.
Unfortunately, that move cost me dearly. First Industrial has generated a more than 1,000% total return since the date of my sale. That's a more than 24% total annualized return, pulverizing the S&P 500's 15.4% total return during that time frame.
Driving the REIT's strong returns over the past decade has been its ability to capture opportunities in the strong industrial real estate market. In particular, the REIT has an excellent track record of developing new logistics properties. That's helped create significant shareholder value.
For example, since 2016, the REIT has invested $1 billion to develop more than 14.7 million square feet of space. These investments have created an estimated $697 million of value, adding $5.50 to its net asset value (NAV). Those investments have also helped First Industrial grow its FFO (funds from operations) per share at a 5.6% compound annual rate while expanding its dividend at a 7.3% compound annual rate.
Trying not to make the same mistake again
I'm currently considering buying shares of First Industrial to play the red-hot demand for warehouse space. However, I haven't yet. Instead, I've built out a basket to bet on that megatrend by purchasing shares of industry behemoth Prologis, Sun Belt-focused EastGroup Properties, and Terreno Realty because of its concentration in tight coastal gateway markets.
While I haven't bought shares yet, First Industrial is firmly on my radar. For starters, it trades at an attractive valuation compared to its peers. It sells for a relatively cheap 27 times its FFO, which is the lowest in its peer group of warehouse-focused industrial REITs. Further, it only trades at a 10% premium to its net asset value (NAV), the lowest in its peer group. It also has a strong investment-grade balance sheet with low leverage metrics.
Meanwhile, First Industrial has lots of growth ahead. The REIT launched several speculative development projects in the past year that are starting to pay dividends. Add its development prowess to its existing assets' fast-paced rental growth rates, and First Industrial sees the opportunity to grow its AFFO (adjusted funds from operations) at a more than 9% annual pace through 2023. When combined with its 2%-yielding dividend, First Industrial could continue producing double-digit total annual returns from here.
While I like that upside, I'm trying to determine if I want to add another industrial REIT to my warehouse basket, and if so, which one. Right now, I'm considering First Industrial and the equally impressive Duke Realty (NYSE: DRE). Both focus on owning logistics properties in leading U.S. markets and have similar valuations, growth prospects, and balance sheets. I'm watching to see if one starts to stand out.
I missed out on a massive gain
Instead of giving up on First Industrial and selling my shares, I should have bought more. That mistake cost me dearly as it has been one of the top-performing REITs over the last decade. I'm trying not to let that mistake cloud my judgment as I build out a basket of REITs to play the warehouse megatrend.