Industrial REITs Definition
Industrial REITs is a real estate investment trust which own or operate real estate properties like manufacturing, warehousing, production, distribution, or any other industrial estate and earn by either leasing or renting them to businesses.
How Does it Work?
Industrial REITs buy spaces or build up spaces that can be leased or rented to businesses for industrial, specifically industrial purposes. Such REITs form a pool of funds that helps their business for investment purposes. REITs collect funding through contributions from either retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more or businesses. These funds are then used to either purchase buildings, industrial hubs (in part or in full), industrial spaces, factories, production centers, etc. or manage, pre-owned, or leased, such industrial properties so that it can be further leased to collect money.
They work on a business model that demands higher dividends to be paid to the investors. These REITs are exempt from federal income taxFederal Income TaxFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more so long as they give 90% of their taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation.read more in dividends to shareholders. Investors also have the incentives of capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more because of rising real estate property rates.
Industrial REITs, like other REITs, issue sharesIssue SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more for equity funding along with corporate-level debt funding. Thus, unlike traditional real estate investment trusts, these funds also trade in public exchange markets.
The Investors’ Perspective
- It is important to note that REITs, including industrial, make long-term investments into properties. Hence, any decision or plan to invest money into such funds should incorporate the long-term view of investments.
- Investment decisions in these REITs should be based on the assessment of the operations of the businessOperations Of The BusinessBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more. The dividend yieldDividend YieldDividend yield ratio is the ratio of a company's current dividend to its current share price. It represents the potential return on investment for a given stock.read more is one of the best measurement tools, and the same can be calculated by dividing the dividends by the cash flow from operationsCash Flow From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more. A higher ratio indicates better returns.
- Always look for REITs that have performed well historically. A good performing REIT is sure to have a strong team that usually presents opportunities for good performance in the future.
- Before making investments, consider understanding the market dynamics, macroeconomic environment in which the REITs operate, and the risk-return profile of the investment.
Examples of Industrial REITs
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Source: Industrial REITs (wallstreetmojo.com)
In the United States market, industrial REITs account for approximately 10% of the broad-based real estate exchange-traded funds. Some of the popular REITs in the industrial sector are:
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- Liberty (LPT)
- Prologis (PLD)
- Americold (COLD)
- PS Business Parks (PSB)
- EastGroup (EGP)
- STAG Industrial (STAG)
- Innovative Industrial (IIPR)
Some of the highest dividend-paying industrial REITs are:
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- Uniti Group, Inc.
- Plymouth Industrial RIET, Inc.
- Industrial Logistics Properties Trust
These REITs have dividend yields of over 7% each.
Different REITs have different specifications for property management. Some such REITs own/manage production facilities while others own/manage warehouses or distribution centers.
Let us look at some of the well-known industrial REITs quickly:
Prologis falls under the logistics sub-category of these REITs. It is one of the largest and highest-rated (based on creditworthiness) REITs and manages warehouses and distribution centers. It has a market capitalization of almost $50 billion and a dividend yield of 2.9%.
Another important player in the industrial space is the Stag industrial REIT, which has logistics and manufacturing spaces. It mostly operates in the United States and is a smaller player. It gave a dividend yield of 4.9% while holding $3.5 billion in market capitalization.
Duke Realty Corporation, U.S. based, is a different REIT which focusses on distribution centers and medical offices. Its market capitalization stands at $10.9 billion and dividend yield at 2.8%.
Advantages
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- Flexibility in managing industrial spaces and modifying them as per the specific needs of businesses or clients comes as an advantage. Thus, adaptability becomes an important consideration in industrial REIT.
- On a similar note, they have to focus less on repairs and aesthetics of the building and properties. Other REITs face this problem due to the aesthetic value of the property.
- Investments in these REITs can be advantages as there has been a dearth of logistics spaces while more and more manufacturing activity is coming on the plate.
Disadvantages
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- The growth factors are heavily reliant on economic conditions. More often than not, constantly changing macro conditions cause volatility in these REITs. One such macroeconomic factor is the interest rate.
- These REITs have short-term nature of leasing. This means that they lease for a shorter term as compared to other real estate properties, and therefore, it affects the growth opportunities associated with REITs.
- They are challenging to set up and thus pave the way for barriers to entry concept. Huge investment in REITs, particularly industrial, causes very few players to enter or sustain the competition.
- Industrial REITs can be subject to the risks of oversupply. During economic prosperity, industrial progress is a given, and this tends to adversely affect the demand-supply profile.
Conclusion
Industrial REITs have performed above expectations in the last decade. This performance is primarily due to the e-commerce wave and the rising demand for technology-friendly industrial spaces. E-commerce giants like Amazon, Walmart, and Home Depot are the biggest investors in industrial spaces.
Until the end of the fiscal year 2019, the REITs saw strong leasing spreads and pushed rent growth quite impressively. Occupancy levels also increased to a record high despite high growth in rents. The two most important factors for this REIT growth have been the performance of industrial stocks and the demand-supply profile of industrial spaces.
It should be noted that these REITs run risk related to financing since they rely heavily on money that has been borrowed from corporates or investors. Increasing interest rates can cause damage to such REITs and deteriorate their margins.
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