School’s Almost Out, but These High-Flying REITs Are In

Investors often get caught up in the short-term ups and downs of the stock market. Right now Mr. Market is in a dour mood, seemingly selling off anything that isn’t nailed down. But you shouldn’t follow along on this ride — instead, focus on the long-term value of what you can buy. And in that regard, real estate investment trusts (REITs) Innovative Industrial Properties (IIPR 1.57%) and Prologis (PLD 0.16%) are still high flyers worth looking at.

Growing with the growers

Innovative Industrial Properties shares are down 50% from their late-2021 peak. And yet if you look back five years, the stock is still up a massive 685%. So despite the recent pullback, this is still very much a high-flying REIT. That’s been driven by rapid growth, which doesn’t look likely to end anytime soon.

Innovative Industrial Properties’ business is pretty simple. First, it uses a net-lease approach, which means that it owns properties but its tenants are responsible for most property-level operating costs. It generally buys via sale/leaseback transactions, meaning that it acquires properties from companies that need to raise cash for other purposes (often growth investment) but want to continue to operate out of the assets being sold. It has long leases, with an average term of more than 16 years. And it is focused on the marijuana sector, buying mainly grow houses.

These properties are not run-of-the-mill industrial buildings, as they need special upgrades and licensing. And perhaps more important, the marijuana sector is still growing as pot gets more and more accepted and increasingly legalized. Specifically, the industry is expected to expand from $24 billion in sales in 2020 to $46 billion in 2026, with another 12 states to go before marijuana is legal in all 50 states. Long-term investors shouldn’t focus on the recent sell-off here, but on the still material prospects for long-term growth.

Moving things around

Prologis isn’t quite as exciting, with its stock down “just” 25% from early 2022 peak, but still up a hefty 133% over the past five years. Given that the S&P 500 Index is only up 67% over that five-year span, Prologis still counts as a high-flying stock.

Prologis owns warehouses, which is really boring compared to marijuana grow houses. The exciting thing here is that moving goods around the world has become increasingly important as online sales have grown. And Prologis has a massive global portfolio, with assets located in key distribution hubs. To put some numbers on this, the REIT owns 3,275 buildings in the United States, 891 in Europe, 308 in South America, and another 261 in Asia. It is easily one of the biggest players in the warehouse sector, and, given the uptick in demand, it has been inking new leases with 37% rent hikes. 

But the most exciting thing here is that the massive demand for warehouse space that’s driving big rent hikes suggests that there’s room for more properties. And on that score, Prologis has a global portfolio of land on which to develop as much as $26.4 billion of properties. In other words, it can keep its business growing via internal investment. That’s a pretty enticing story.

Opportunity could be knocking

If you can think like a contrarian, it looks like long-term high flyers Innovative Industrial Properties and Prologis are just pulling back from recent peaks. That happens from time to time, and should probably be viewed as a buying opportunity for growth-minded investors, given their strong business outlooks. Meanwhile, Innovative Industrial’s 5.5% dividend yield should be fairly attractive even to income investors, while Prologis with its roughly 2.5% yield is still more about growth than income.