At one point, industrial real estate investment trusts (REITs) were Wall Street darlings thanks to the increased demand for warehouse space during the pandemic. Then they fell out of favor as a result of rising interest rates, which increase operating costs for REITs. Both Rexford Industrial (REXR 0.72%) and Prologis (PLD 0.70%) have risen substantially off of their recent lows, but still remain below their longer-term highs. Now could be a good time to grab them while they look like they are still on sale.
Rexford has gone all in
Rexford Industrial is a highly focused business. Not only does it only own industrial properties, with a heavy emphasis on warehouses, but it only invests in Southern California. This is probably one of the least diverse REITs you can buy. But that has to be weighed against the inherent attractiveness of the Southern California market.
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Southern California is the fourth-largest industrial market in the world and the biggest such market in the United States. The reason for this is fairly simple: Geographically speaking, Southern California is a key gateway between Asia and the U.S. market. The region's vacancy rate of around 2.8% is well below the 5.5% rate of other major domestic industrial markets. A lack of industrial property supply is exacerbated by the fact that there is limited supply in the largely developed region and, on an ongoing basis, demand for housing is resulting in the industrial property being converted into the housing stock. All told, Rexford is a big player is a very attractive space.
Rexford has been able to increase rents on expiring leases at a very rapid clip. It also has redevelopment opportunities in its portfolio. And acquisitions, which are unpredictable, should add further growth over time. Management believes it can fairly easily expand net operating income by $240 million to $808 million (a 40%-plus increase) over the next three years.
The dividend yield is just 3.3%, but the most recent dividend boost was a huge 9% or so. If Rexford can keep increasing its dividend at that pace even in the face of higher interest rates, investors would do well to take a closer look here while the stock remains some 40% below its 2022 highs. Time could be of the essence, though, given that the shares are up more than 15% since their October 2023 lows.
Prologis is simply massive
While Rexford has focused all of its efforts on one really good market, Prologis has basically gone in the opposite direction. Prologis is the largest industrial REIT, with substantial exposure to the most important global transportation hubs. To put a number on that, the REIT controls 1.2 billion square feet of warehouse space spread across four continents. Equally notable is the fact that management estimates it has a $40 billion internal investment opportunity in the form of vacant land around the properties it currently owns.
Prologis' yield is just shy of 3.1%. However, the annualized dividend growth rate over the past decade was a robust 11%. The most recent hike was 10%, so the pace hasn't significantly slowed down. But the real story here is about size, with Prologis sporting a massive $115 billion market cap (by comparison, Rexford's market cap is roughly $11 billion). This gives Prologis the scale to act as an industry consolidator even as it invests in its $40 billion internal growth pipeline. Those positives layer on top of the sizable rent hikes it has been able to push through on renewing leases.
Prologis' shares have risen more than 25% since their October 2023 lows. But they remain about 25% below their 2022 high-water mark. If you like owning well-positioned industry giants, Prologis stock should appeal to you.
Time could be of the essence
Rexford and Prologis continue to highlight the strengths of their underlying businesses. While the massive demand that resulted from the pandemic may be in the past, both REITs believe their futures remain very bright. If you are a dividend-growth investor, now could be the time to jump aboard -- before the stocks surge even higher.
