Better Buy: STAG Industrial or Prologis?

Two of the hottest industrial real estate investment trusts (REITs), STAG Industrial (STAG -1.29%) and Prologis (PLD -1.69%), recently reported their full-year 2022 earnings, giving a glimpse at what could lie ahead for the red-hot industry.

Both companies have benefited from low supply and high demand for industrial real estate over the last few years, but with the economy slowing, it seems one may be faring better than the other. If you're wondering which stock is the better buy between the two right now, let's take a look at each company and see which one comes out ahead.

1. Portfolios

Both companies own and lease various types of industrial real estate, ranging from warehouses, manufacturing buildings, third-party logistics centers, and distribution facilities. STAG Industrial operates exclusively in the United States, while Prologis has a global footprint, leasing industrial properties in South America, Asia, and Europe. With interest or ownership in nearly 5,500 industrial buildings, Prologis's portfolio is over 10 times the size of STAG Industrial, which has interest and ownership in just over 560 buildings.

The limited supply of industrial real estate in the United States has pushed occupancy for both companies to record levels. Prologis's portfolio was 98% occupied at the end of 2022, while STAG Industrial's was 99% occupied. Clearly, this is a sign of healthy demand, even with a slowing economy. 

2. Growth opportunities

In 2022, STAG Industrial executed 101 leases to new or renewing tenants, which were leased for around 24% more than the year prior. It also acquired 26 buildings, adding 20.4 million square feet of real estate to its portfolio. This is a slightly lower level than in 2021, but rising interest rates are impacting the company's cost of borrowing, motivating it to slow its rate of growth.

Prologis went on a massive shopping spree last year, spending over $2 billion on third-party acquisitions and another $2.8 billion in new acquisitions. It also bought one of its largest competitors, Duke Realty, in a $23 billion deal, adding 142 million square feet of operational properties and 7 million square feet of active developments to its portfolio in 19 markets across the country.

Both companies have indicated plans to slow down expansion efforts in 2023 to assess the impact of inflation on the economy. Prologis is expecting to spend around $5.4 billion in developments and acquisitions in the coming year, while STAG Industrial plans to spend around $300 million to $700 million.

3. Profits and cash

Both companies reported healthy earnings for the full year of 2022. However, Prologis's earnings outshined STAG Industrial's. Core funds from operation (FFO), a metric that works similarly to earnings per share (EPS) for REITs, grew by 24% year over year for Prologis and only 7.8% for STAG Industrial. Prologis also saw net earnings per share (another key metric for REITs) grow by nearly 8%, while STAG Industrial saw net earnings decrease by 13% compared to last year.

Data source: Prologis' and STAG Industrial's full-year 2022 earnings. Chart by author.

Rents for Prologis's portfolio also seem to be growing at a larger clip than its smaller counterpart. In the fourth quarter of 2022, Prologis saw a net effective rent change of over 50%, while STAG Industrial saw a 14% increase during that same period.

STAG has done a great job reducing its debt exposure as of late. The company paid off higher-cost debt earlier in the year and ended 2022 with a debt-to-earnings ratio before interest, taxes, depreciation, and amortization (EBITDA) of 5.2 times. This is right around the REIT average. It also had $847 million in cash and cash equivalents on hand, which was more than enough to pay its near-term debt obligations and maintain its dividend payout. 

Prologis is flush with cash, having $4 billion in liquidity. Its debt ratios are also very low for a REIT, at just 3.7 times its EBITDA. The REIT has no major debt maturities until 2026, putting it in a strong financial position at the start of the year.

4. Dividend coverage and yield

STAG Industrial not only pays its dividends monthly, but it has a 3.8% yield, which is over 1% higher than Prologis' at the time of this writing. STAG has increased its dividend payout every year since its IPO in 2011, doubling its payouts over the last 12 years. 

Data source: Prologis' and STAG Industrial's full-year 2022 earnings. Chart by author.

Prologis has maintained just nine years of consistent dividend increases, but the REIT has grown its payout at a faster clip. Prologis's payouts have risen 182% over the last 10 years, and its dividends are better covered than STAG Industrial's.

Which is the better buy?

Given the greater growth opportunities, stronger financial position, and latest earnings, Prologis would be my pick out of the two. STAG Industrial may offer more favorable pricing right now, but it has shown slower growth rates and is more leveraged with deby. Currently, the stock is trading around 16 times its FFO, while Prologis trades at a premium of 24 times its FFO. It also pays a higher yield. But the stock has a lot more risk and fewer growth opportunities. Making Prologis the clear pick of the two.