To pick two great real estate investment trusts (REITs) to buy in January, I decided to look at my own holdings for candidates that other investors might consider as long-term buy and holds.
Two stood out so much that I plan to plunk down some more cash on this pair of real estate investments.
Alexandria Real Estate Equities (ARE 0.80%) and Innovative Industrial Properties (IIPR -0.29%) are proven performers and, although in very different businesses, share some traits that make them ideal for investors interested in stability and the income that dividend-producing stocks like this provide.
For one, they're both based in San Diego, but more importantly they both serve growing markets, enjoy a moat from competition, and have the ability to raise rents through escalation clauses built into their long-term net leases. Here's why they merit additional investment.
Alexandria Real Estate Equities is a leader in life sciences properties
The COVID-19 pandemic underscored the enormous importance and potential of the life-sciences businesses that Alexandria has been catering to since its launch as a garage start-up 27 years ago. A pioneer then, it's a power now in collaborative spaces for life sciences, agtech, and technology, with clusters and campuses in the key markets of Boston, San Francisco, New York City, San Diego, North Carolina's Research Triangle, and Bethesda, Maryland, near the National Institutes of Health and the related National Cancer Institute.
This REIT's client list of more than 700 tenants includes vaccine-makers Pfizer and Moderna, the latter of which just inked a deal for perhaps the REIT's biggest lease yet: 462,000 square feet in Cambridge, Massachusetts, that will serve as Moderna's corporate and R&D headquarters, and not far from a Moderna manufacturing facility in Norwood, Massachusetts. It also underlines Alexandria's commitment to the Boston market, which will now account for nearly a fourth of the 64 million rentable square feet the REIT has in its portfolio.
Alexandria's clients, besides producing life-saving treatments, are helping the REIT reward shareholders. A total payout of $4.48 per share for 2021 was a 6% gain over 2020's final total and now provides a yield of about 2%.
What's more reassuring is that its payout ratio -- quarterly dividends divided by funds from operations, a key metric of REIT performance -- was at a quite modest 58%.
Other major real estate investors are piling into this market, but Alexandria's dominant presence, ongoing investment (about 25 million square feet of new rentable space is in various stages of development), and stable, proven management provides reason for optimism.
Innovative Industrial Properties continues on a growth tear
Like Alexandria Real Estate Equities, Innovative Industrial Properties is a pioneer in its niche. Founded in 2016, IIP leases facilities to medical marijuana growers through long-term, triple-net leases, which require the tenant to pick up the tab for expenses such as taxes, insurance, and maintenance.
IIP also specializes in sales-lease back deals, in which the REIT buys the property from the growers and then leases it back to them. That provides critical capital to an industry that traditional, highly regulated lenders typically still avoid.
More than 35 states allow medical marijuana, and that list will grow even if the federal government never gets around to legalizing the stuff. If and when that happens, that could change part of the equation for IIPR, but by then the moat around its market should be pretty impressive, if its current growth is any indication.
On Dec. 14, IIP announced the purchase of 27 fully leased properties in Colorado, Pennsylvania, and North Dakota, a $72.7 million purchase that will give it a portfolio of about 7.7 million square feet at 103 properties in 19 states.
IIP went public in December 2016, and the total return from a $10,000 investment then would now be worth about $160,000. That's quite a return.
Although the shares have dipped lately from a high of about $288 to about $240 -- giving it a yield of about 2.3% based on annualized dividend of $6 per share -- the expanding revenue stream from those new properties and the company's dominance in its niche gives me confidence in the long-term prospects for this growing business.
Good prospects in January and beyond
Innovative Industrial Properties is for now the only company of its kind traded on the major exchanges. Alexandria Real Estate Equities started out that way, too. Both are well established and expanding their positions within their niches, and each presents good arguments for being a top REIT to buy in January and beyond.