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Motley Fool Issues Rare “All In” Buy Alert
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Most industrial dividend stocks are easily impacted by economic cycles, making the industrial sector a hard play today. But industrial real estate can offer investors a bit more security. Since these companies benefit from earning revenue through long-term leases, they can offer more stability during volatile markets.
The key is to follow the lead of smart investors, who choose strategic industrial stocks that can withstand market swings and help ride out the impacts of recessions. Three such industrial stocks that smart investors are buying are STAG Industrial (STAG 2.00%), Americold Realty Trust (COLD 4.02%), and Prologis (PLD 2.54%). Here’s a closer look at why these stocks are great buys.
Kristi Waterworth (STAG Industrial): STAG Industrial is a pure-play industrial real estate investment trust (REIT), with facilities for lease in a total of 40 states, up from 26 when it went public in 2011. Since its initial public offering (IPO), it’s grown from 14.2 million square feet of rental space to 111.5 million square feet in leasable property. In addition, in that time, STAG Industrial has improved its balance sheet. Its debt-to-capital ratio has dropped from 46.8% when it went public to just 30.2% as of the most recent quarter.
STAG Industrial’s top 10 tenants, which make up 10.5% of all lease income, are large, well-established companies, including Amazon (3.1% of STAG’s total lease income), FedEx (0.9%), Tempur Sealy International (0.9%), and Penguin Random House (0.7%), among others. As of Dec. 31, 2021, 90.3% of STAG Industrial’s portfolio was centered on warehouse and distribution, with only 8% in light manufacturing.
E-commerce as a percentage of total retail sales continues to remain steady at 14.5%, even as retail sales climb, according to data from the Census Bureau. From the second quarter of 2021 to Q2 2022, e-commerce sales increased 6%, from nearly $241 billion to $257 billion, despite rising inflation cutting into discretionary spending. Because STAG Industrial services many companies that rely on e-commerce for their success, this growth in the overall industry is vital to the long-term growth of STAG as well.
STAG Industrial has seen a remarkable gain in funds from operations (FFO) over the last year due to the growth of e-commerce demand. In the three months ended June 30, FFO sat at $101.1 million, up just over 20% versus the prior-year period. Furthermore, net operating income has increased year over year since 2019. In 2019, net operating income was $330.7 million; in 2020, $394 million; and in 2021, $454.2 million.
A continuous stream of new property acquisitions has also aided the growth of STAG Industrial. In just the second quarter of 2022 alone, eight new properties totaling 1.467 million square feet were acquired, with weighted average leases of 9.1 years.
STAG Industrial is doing a great job anticipating the needs of e-commerce and acquiring property to meet that increasing demand at a steady pace. Although this growth rate can’t be guaranteed, the management team at STAG Industrial certainly seems to have its eyes fixed on the future, and with a low debt ratio, the company has enough financial flexibility to grow in new directions as the economy dictates.
Mike Price (Americold Realty Trust): Americold is a niche operator of cold storage facilities. The warehouses are typically used for food storage and other things, like pharmaceuticals, that are required to be kept cold.
Most industrial real estate stocks had a good 2021 and have had a subpar 2022. Americold didn’t do well in either year. When the pandemic was forcing years’ worth of e-commerce growth into a short time frame, workers were quitting the food industry and the supply chain was falling apart, so Americold’s occupancy rate suffered.
The annual physical occupancy rate fell from 77% in 2018 to 72% in 2020 and 70% in 2021. Americold’s economic occupancy (which includes pallets that its clients are contractually obligated to pay for but aren’t using) declined from 80% in 2018 to 77% in 2021. Through Q2 2022, the company’s warehouse segment had increased economic occupancy by 288 basis points from the same quarter in 2021.
Americold spent years growing via acquisitions and building a total portfolio of 249 facilities. Then got hit hard by the pandemic. Not only did occupancy drop, but inflation drove the REIT’s costs up and cash flow down. Total assets almost doubled from 2019 to 2021 and operating cash flow basically stayed the same.
The good news is that the industry is starting to recover. According to management’s second-quarter press release, the 288-basis-point jump in occupancy is a direct result of improvement in the food industry labor market, which increased food production. Total revenue through Q2 was up 11.5% from the year-ago period.
The company could be ready for a breakout, but it’s still priced for a downturn. The stock’s current price-to-book ratio of 1.75 is far below its pre-pandemic multiple, which was as high as 5.18. As global food industry growth resumes, Americold should prosper, and you can buy it for a bargain today.
Liz Brumer-Smith (Prologis): Prologis is the largest industrial REIT in the world. With interest and ownership in over 4,300 facilities in 19 countries for a total of 1 billion square feet, its massive footprint makes it the leader in global industrial real estate.
The REIT has heavy ties to the e-commerce space, with roughly 23% of its tenants falling in the retail caategory. But it also serves the manufacturing, third-party logistics, wholesale, and transportation industries.
Lack of supply and high demand in recent years coupled with its diverse tenant mix has helped Prologis achieve incredible growth. Less than 3% of its properties are empty and its effective rental rates as of Aug. 31 have grown 52.1% from last year.
Plus, the company is well funded and rapidly expanding. Prologis’ acquisition of Duke Realty was just approved, which will add 153 million square feet of operational industrial space to its U.S. portfolio.
The stock is down 18% over the last year, which has bumped its dividend yield up to nearly 3%. Its ratio of price to 2022 projected FFO is 19 times, meaning it’s still somewhat richly valued compared to its industrial REIT peers. However, for a company with its size, scale, balance sheet, and growth opportunities, today’s pricing makes it a fantastic buy.
That is precisely why billionaires and fund managers Ken Fisher, Ron Baron, and Joel Greenblatt have added to their positions in Prologis in recent months.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Kristi Waterworth has positions in Amazon, FedEx, and Stag Industrial. Liz Brumer-Smith has positions in Americold Realty Trust, Duke Realty, Prologis, and Stag Industrial. Mike Price has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, FedEx, Prologis, and Stag Industrial. The Motley Fool has a disclosure policy.
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