When an asset is described as "hot" on Wall Street, it suggests that investors are buying it hand over fist. But nothing goes up or down in a straight line, so there is always an opportunity for those with a focus on the long term. Right now, Prologis (PLD -1.54%) and Innovative Industrial Properties (IIPR -2.54%) are out of favor. But don't let that fool you: They have rewarded investors well, and have plenty of growth opportunities.
Where the action is
Prologis' core business, owning warehouses, is among the most boring in the world. They are just a way station for products as they travel across the world. Still, the supply chain doesn't work without warehouses, and this real estate investment trust (REIT) not only owns a lot of them, but they are generally very well located. To put a number on that, Prologis owns 1 billion square feet of warehouse space spread across four continents and 19 countries. Most of these assets are located in key shipping hubs.
The stock is down around 30% so far in 2022. That's an opportunity to add this long-term growth story to your portfolio, though -- and note that it is still up more than 100% over the past five years. Where's that growth going to come from? A major acquisition in the near term, development over the long term, and rent hikes all along the way.
Prologis is in the process of buying smaller peer Duke Realty (DRE) in an all-stock transaction. Prologis expects the deal to be $0.20 to $0.25 per share accretive to core funds from operations (FFO) in the first year.
Meanwhile, it estimates that it has nearly $28 billion worth of development opportunity on the roughly 10,600 acres of development land it owns. That should provide a steady stream of investment opportunity for the REIT.
And between these two opportunities are rent increases, as Prologis rolls over expiring leases to current market rates.
Prologis' 2.5% dividend yield isn't huge, but the story here is growth. The current stock pullback, meanwhile, shouldn't change the long-term trajectory for investors who think in decades and not days.
Marijuana REIT Innovative Industrial Properties involves a bit more risk, for several reasons.
First, marijuana is basically a new industry on a legal front, so there isn't a huge track record to go by.
Second, because it is new, there's a bit of a land grab going on that will eventually lead to an industry shakeout. Innovative Industrial is a key supplier of capital here, buying assets from marijuana growers so they can build their systems out. It's something of a picks and shovels play on the growth of the marijuana industry, which is expected to nearly double in size between 2020 and 2026.
The stock, however, is down around 50% so far in 2022, though still up well over 500% during the past five years. The yield is a historically high 6.4%. The problem is that investors are worried that the eventual marijuana shake-out will leave Innovative with vacant properties. That's entirely possible -- but there are some specifics to consider.
Marijuana grow houses are unique assets that are tightly regulated and subject to strict permitting processes. The ability to use them as grow houses generally sits with the property, not the lessee. So that gives the REIT a clear edge in releasing assets to other growers should current tenants run into problems.
There could be a concession on the rent, but it's highly unlikely that Innovative Industrial Properties ends up with a total loss given the still-strong demand growth expected for marijuana. You'll need a stronger stomach to jump in here, but if you see a bright future for pot, then the risk might be worth it.
Growth on sale
When the market turns bearish, investors often throw out the baby with the bathwater. There are clearly risks in any investment, but the growth prospects for Prologis and Innovative Industrial Properties still seem strong. The current sell-off, which has only dented the stock price growth for patient investors, could be just the opportunity you need to add these hot long-term growth names to your portfolio.