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STAG Industrial

3 Industrial REITs to Buy in September

Sep 03, 2020 by Matthew DiLallo

Industrial real estate investment trusts (REITs) have bucked the downward trend in the REIT sector this year. According to the National Association of Real Estate Investment Trusts (Nareit), the average industrial REIT has generated a more than 11% total return this year. For comparison's sake, the FTSE Nareit Equity REIT index has declined by about 15%. Driving the subsector's strong returns has been its excellent rental collection and growth rates. Logistics properties are in high demand due to the increased adoption of e-commerce.

While 2020 has been a banner year for the sector, it still has lots of room to run. According to commercial real estate services company JLL, the sector will need another 1 billion square feet of warehouse space by 2025. That suggests lots of growth ahead for the industry. Three industrial REITs well positioned for this trend are Prologis (NYSE: PLD), Duke Realty (NYSE: DRE), and STAG Industrial (NYSE: STAG), which makes them great buys this September.

Prologis: A leader in more ways than one

Prologis is a global leader in logistics real estate, with 4,655 buildings containing 963 million square feet of leasable space spread across 19 countries. The company complements its top-tier portfolio with an excellent financial profile. It has one of the highest credit ratings in the REIT sector, and its business generates $1 billion in excess cash after covering its 2.3%-yielding dividend.

Despite its size, Prologis has grown its FFO and dividend at an above-average rate during the last one-, three-, and five-year periods versus the S&P 500 and other logistics REITs. That above-average growth rate appears poised to continue due to its development projects and sizable land bank. Combine that growth with the company's global scale and top-tier financial profile, and it should be near the top of a REIT investor's buy list these days.

Duke Realty: Amazon-powered growth

Duke Realty is a U.S.-focused logistics REIT. The company currently owns 518 facilities with 156 million square feet of rentable space across 20 key U.S. logistics markets. It also has a strong financial profile backed by an investment-grade credit rating and a well-covered dividend that currently yields 2.4%. That provides the company with lots of financial flexibility to expand its portfolio, AFFO, and dividend.

One thing that stands out about Duke Realty is its relationship with Amazon (NASDAQ: AMZN). The e-commerce giant is Duke's top tenant at 9% of its annualized net lease value, making it three times larger than the industrial REIT's second-largest tenant. The companies have been working together to support Amazon's growing logistics needs, which include building more fulfillment and sortation centers as well as last-mile delivery stations.

As Duke continues to develop those types of properties to support the growth of Amazon and other major e-commerce players, in turn the company can continue to grow shareholder value. This REIT estimates it can grow its AFFO at a mid-to-high single-digit rate, which should support similar increases in its dividend.

STAG Industrial: An income-focused industrial REIT

Like Duke Realty, STAG Industrial focuses solely on the U.S. market, though it has a more diversified portfolio because it owns properties across the industrial sector. Overall, it has 457 properties, with 91.8 million square feet of space across more than 60 markets. While it also counts Amazon as its largest tenant at 2.5% of its ABR, it has a much more diversified tenant base. The next largest customer contributes 1.8% of its ABR, and its portfolio includes exposure to more than 45 different industries.

Aside from its diversity, another factor that stands out about STAG Industrial is its dividend. The REIT offers a much higher yield -- it's currently at 4.4% -- that it pays monthly. Those two factors make the industrial REIT a more desirable option for those seeking income from the industrial sector. It's also worth pointing out that the REIT's dividend is on solid ground, as the company backs it with a solid investment-grade balance sheet and good dividend coverage. That gives it the flexibility to continue expanding its portfolio, FFO, dividend, and shareholder value.

A lot more growth ahead

The world needs a lot more industrial real estate to support the continued growth of e-commerce, so industrial REITs should be able to keep generating above-average returns in coming years. There are many different ways to invest in this trend, including going global (Prologis), staying local (Duke Realty), or focusing on income (STAG Industrial), giving REIT investors lots of great options these days.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew DiLallo owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Stag Industrial and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.