Shares of real estate investment trust Prologis (NYSE: PLD), one of the largest industrial property landlords on the planet, rose more than 17% in January, according to data provided by S&P Global Market Intelligence. It wasn't alone.
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Duke Realty (NYSE: DRE), a longtime industry stalwart, was up nearly 13%. Relative newcomer STAG Industrial (NYSE: STAG) and lesser-known Monmouth Real Estate Investment (NYSE: MNR) both rose nearly 11%. In short, it was a good month for industrial REITs, particularly when you compare their gains to the far more modest 8% increase in the S&P 500 index.
Although these industrial REITs outdistanced the S&P 500, most tracked along with Vanguard Real Estate ETF (NYSEMKT: VNQ), an exchange-traded fund that's a good proxy for the sector. That ETF was up around 12% in the month. So, in many ways, there isn't anything that stood out for the broader group. That said, industry giant Prologis' gain was a notable deviation:
It was the only REIT of this quartet to release earnings in January. On Jan. 22, Prologis reported that core funds from operations (FFO) were up nearly 8% year over year in 2018. Furthermore, it was able to implement record rent hikes in the fourth quarter, both in the United States and across its globally diversified portfolio. CEO Hamid Moghadam said, "We had a great fourth quarter, capping out our strongest year ever." It's no wonder that investors have been pretty positive about Prologis, though the late-in-the-month release of earnings suggests it wasn't the main driving force for the monthly gain.
The real driver for the entire group was a shift in investor sentiment. In late 2018 Wall Street was in a particularly dour mood, pushing the broader market and all of these industrial REITs sharply lower. They rebounded in January as investors started to get more positive about the future. That said, there was some other news worth noting. For example, STAG announced a dividend increase, though it was relatively tiny at less than $0.01 a share (STAG pays its dividend monthly). Monmouth also declared a dividend, but there was no change in the rate.
That said, Monmouth does deserve a little more attention here. Although the stock's gain was roughly in line with that of the broader REIT space in January, its decline at the end of 2018 was far worse than average. When all was said and done last year, Monmouth was down 30% -- easily outdistancing the 10% decline in the Vanguard Real Estate ETF. There are a couple of reasons for investors to be wary about Monmouth. For starters, roughly half of its portfolio is leased to just one tenant, FedEx. That's a huge concentration risk, especially right now: FedEx, while a financially strong company, is facing headwinds from a changing shipping landscape, including Amazon entering the space.
But that's not all. Monmouth also has over $170 million in securities held for sale; these are a collection of other REIT shares and REIT securities. This is an unusual approach in the REIT space, particularly since some of the securities Monmouth has chosen to invest in are in risker REITs. If you are looking at Monmouth, you need to dig in and really understand what you are buying. It isn't your typical industrial REIT, a fact that showed up pretty clearly in 2018.
January was an exciting month for industrial REITs, but in truth very little changed on a fundamental level. In fact, with the exception of Prologis reporting strong earnings, there was virtually no news of note. The upturn was really just a recovery from the sell-off that marked the final months of 2018. In the end, market sentiment was the big driver here. Investors shouldn't read too deeply into the January gains.
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