When an asset is described as “hot” on Wall Street, it suggests that investors are buying it in spades. But nothing goes up or down in a straight line, so there’s always an opportunity for those focused on the long haul. At present, Prologis (PLD 1.11%) and Innovative industrial properties (IIPR 1.73%) are in disgrace. But make no mistake: they have rewarded investors well and offer plenty of opportunities for growth.
Where is this action located
Prologis’ core business, owning warehouses, is one of the most boring in the world. They are only a transit point for products traveling around the world. Yet the supply chain doesn’t work without warehouses, and this Real Estate Investment Trust (REIT) not only has plenty of them, but they’re usually in great locations. To quantify this, Prologis has 1 billion square feet of warehouse space spread across four continents and 19 countries. Most of these assets are located in key maritime hubs.
The stock is down around 30% so far in 2022. This is an opportunity, however, to add that long-term growth story to your portfolio – and note that it’s still up over 100%. % over the last five years. Where will this growth come from? A major short-term acquisition, long-term development, and rent increases along the way.
Prologis is buying smaller peers Duke Real Estate (DRE 1.31%) in an all-stock transaction. Prologis expects the deal to be $0.20 to $0.25 per share accretive to funds from basic operations (FFO) in the first year.
Meanwhile, he estimates he has nearly $28 billion in development opportunities on the approximately 10,600 acres of development land he owns. This should provide a steady stream of investment opportunities for the REIT.
And between those two opportunities are rent increases, as Prologis renews expiring leases at current market rates.
Prologis’ 2.5% dividend yield isn’t huge, but the story here is growth. The current pullback in equities, meanwhile, is unlikely to change the long-term trajectory for investors who are thinking in decades, not days.
Slightly more risky
Marijuana REIT Innovative Industrial Properties carries a little more risk, for several reasons.
First, marijuana is basically a new industry legally, so there’s not a huge track record to follow.
Second, because it’s new, there’s a bit of land grabbing that will eventually lead to industry disruption. Innovative Industrial is a key provider of capital here, buying assets from marijuana growers so they can grow their systems. It’s kind of a game of picks and shovels about 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 it’s still up more than 500% in the past five years. The yield is a historically high level of 6.4%. The problem is that investors fear that the eventual marijuana withdrawal will leave Innovative with vacant properties. It is entirely possible, but there are a few details to take into account.
Marijuana grow houses are unique assets that are tightly regulated and subject to strict licensing processes. The ability to use them as grow houses usually belongs to the property, not the tenant. This therefore gives the REIT a definite advantage to release assets to other producers if the current tenants run into problems.
There could be a concession on rent, but it’s highly unlikely that Innovative Industrial Properties will end up with a total loss given the still-strong growth in expected demand for marijuana. You’ll need a stronger stomach to jump here, but if you see a bright future for the pot then the risk is worth it.
Growth in sales
When the market turns bearish, investors often throw the baby out with the bathwater. There are clearly risks in any investment, but the growth prospects for Prologis and Innovative Industrial Properties still look solid. The current sell-off, which has only hindered stock price growth for patient investors, might be the opportunity you need to add these long-term growth names to your portfolio.