The forgotten leg of the technology trifecta

I've spent significant time this year writing about the two more dominant legs of what I call the “technology trifecta.” So if you’re a regular reader, you might be sick of both topics by now.

Don’t worry. I won’t write about them again today. But I do maintain that data centers – the physical real estate that supports artificial intelligence (AI), cloud computing, and our overall modernized world – and the cell towers that allow all that information to flow freely from device to device are absolutely essential investments.

Even if you don’t buy into them personally, you have to be happy someone else is.

Year to date, data center real estate investment trusts (REITs) have returned 21.4%. Cell tower REITs, meanwhile, are up just 4.6% in part because of the continuing shade SpaceX (SPCX) owner Elon Musk keeps throwing at them.

For comparison’s sake, the Equity REIT Index is up 7.7% and the S&P 500 has returned 12.3%.

I maintain there’s still opportunity in both the data center and cell tower realms. But there’s also opportunity in the third technology trifecta leg that I’ve neglected a bit this year: industrial real estate.

This category of REIT has returned even less than cell towers this year, coming in at an underwhelming 3.5%. Oversupply that stemmed from the shutdown era, cooling demand, and elevated interest rates – or at least the stigma of such – have all negatively weighed on these companies’ shares.

But after looking over the first round of third-quarter earnings reports, I'm seeing some good signs in the sector. The industry could be nearing an important inflection point.

In which case, this is a good time to take a closer look at these unloved stocks.

For whatever reason, many industrial REITs tend to lead the way in reporting earnings each quarter. And Prologis (PLD) – which I just wrote about last week – is one of the earliest of even those early birds.

Unsurprisingly, the world's largest industrial landlord delivered another solid quarter. It didn’t get where it is through poor management, and its continuing dedication to quality and growth showed in its:

As a result, management shifted its core FFO from $6.22–$6.30 per diluted share to $6.25–$6.29. And while that did eliminate a penny of potential at the high-end, it also raised the midpoint guidance by several cents.

CEO Dan Letter did say that clients have leaner inventories than prior years but added that much of excess capacity is now cleared. Besides, e-commerce, advanced manufacturing, and data center buildout business are all doing very well.

Another standout industrial REIT this quarter was one of my longtime industrial favorites, EastGroup Properties (EGP).

This Sunbelt-based company specializes in shallow-bay industrial properties, which are smaller warehouses meant for up to 50 tenants at a time. That focus is paying off for it, as it also delivered a beat-and-raise quarter.

FFO rose 7.9% year over year to $2.45 per share, and cash same-property NOI increased 7.1%. Rental rates on new and renewed leases gained 36.3% on a straight-line basis. And EastGroup's operating portfolio stayed at a very attractive 97.3% leasing level.

It wasn’t surprising then that management raised full-year FFO growth expectations from 6.8% to 7.5%.

Obviously, I was pleased to see all that. But I think the most important aspect of EastGroup’s operations is how well it’s expanding even under less-than-ideal economic conditions.

You could even say it’s strategically benefiting from them, in fact.

Management raised its 2026 development-start guidance from $325 million to a record $390 million. And it increased acquisition guidance as well from $215 million to $360 million.

You see, higher interest rates and elevated construction costs are automatic negatives for marginal developers. But they don’t have to throw off regional players like EastGroup.

It’s well-positioned to step in and take advantage of situations that competitors with more expensive capital and weaker balance sheets just can’t handle right now. So that’s precisely what it’s doing.

Perhaps the most interesting Q3 industrial REIT report so far came from Rexford Industrial Realty (REXR).

Rexford, as some of you know, operates exclusively in infill Southern California. This area just so happens to be one of America's largest and most supply-constrained industrial markets.

Even so, Rexford has seen its fair share of supply overload the last few years. And shares have suffered as a result.

Yet it’s hard not to cheer at Rexford’s most recent quarterly reveal, which showed improving operating trends. Management also made significant progress on its portfolio realignment and deleveraging strategy.

The REIT executed 3.7 million square feet of leasing during the quarter, for one thing. And better still, same-property ending occupancy rose a sequential 200 basis points (bps) to 96.9%.

Cash leasing spreads came in at −3%, a meaningful improvement from −11.3% in the previous quarter, while net-effective leasing spreads reached 7.1%.

Rexford has also been aggressively recycling capital, completing $1.5 billion of dispositions year to date. This included a $1.2 billion portfolio sale of 22 properties in Q3.

All the while, it’s been repurchasing shares. Since it bought back $408.7 million worth from July 1, that brings year-to-date repurchases to roughly $709 million.

Another attractive detail we learned was how far leverage fell in the quarter. Net debt to adjusted EBITDAre (earnings before interest, taxes, depreciation, and amortization for real estate) declined from 4.5x in Q2 to just 3.8x.

That’s partially because Rexford is selling buildings it doesn’t need, then using those proceeds for its buybacks. Naturally, this can create powerful capital allocation.

Up next in the industrial earnings season lineup is STAG Industrial (STAG), which should report tomorrow after the market closes. It offers a perspective on coastal-focused landlords, so I'll be paying close attention to its results.

Then there’s Terreno Realty (TRNO). This REIT operates exclusively in the supply-constrained markets of New York; New Jersey; Washington, D.C.; Miami; Los Angeles; San Francisco; and Seattle – giving yet another interesting angle into U.S. industrial properties.

Really, the entire sector is a fascinating study right now since it enjoyed such substantial growth in the 2010s with the rise of e-commerce. And then Covid intensified that trend even more.

But demand eventually evened out while supply was still expanding, leaving the industry in the lurch.

As the chart above shows, average industrial REIT FFO growth was about 10% from 2017 to 2025… only to slow to 4.7% so far this year. Yet as we’re seeing, there’s still a lot to like here between healthy occupancy levels, improving leasing activity, and positive rent spreads.

Out of the three companies we’ve covered today, I’m especially impressed by Prologis. It’s trading at 25.2x with a dividend yield of 3.4%.

Shares are up 36% in our SWAN Portfolio, and we’re forecasting returns of 15%–20% over the next 12 months.

Happy SWAN investing,

Brad Thomas
Editor, Wide Moat Daily