Industrial REITs are real estate investment trusts that develop or acquire properties such as warehouse space, distribution centers, manufacturing, research and development, and other similar property types. The appeal to this type of commercial real estate as an investment is that industrial properties play a critical role in almost every industry.
The demand for industrial real estate has been steadily increasing for several years. The growth in e-commerce has played a major role in this demand. Since fewer products are sitting on store shelves, more warehouse space is needed. More distribution centers are also needed as companies are constantly working to improve the efficiency of their supply chains to quickly get goods to their customers.
Industrial REITs are a popular investment because of the growth in their real estate sector and the reduced risk that comes with commercial properties that are more of a necessity than a luxury, like hotel and retail properties.
When it comes to industrial REITs, you want to look closely at the strength of their leases. Particularly, you'll want to consider the weighted average lease term (WALT) and the types of tenants they serve.
Industrial REITs with real estate assets built specifically for a certain type of business will likely have a harder time replacing any tenants that leave. If they also have a significant number of leases that are set to expire within the next five years, there may be some added risk of the company losing revenue as those leases come to an end.
Most industrial REITs don't pay high dividends compared to many other types of REITs. Many investors buy this type of REIT for growth instead of the dividend income. Being seen as one of the safer types of REIT investments, industrial REITs can provide stability throughout just about any economy.
We're going to look at three industrial REITs to buy now.
Monmouth Real Estate Investment Corp.
Monmouth Real Estate Investment Corp. (NYSE: MNR) is one of the oldest industrial REITs on the planet. Founded in 1968, the company has had plenty of time to strategically build a portfolio of properties aimed at long-term growth.
Monmouth focuses on long-term single-tenant net-lease properties to investment-grade tenants. In fact, roughly 81% of its rental revenue comes from investment-grade tenants. Monmouth currently has a 99.4% occupancy rate and is in its fifth consecutive year of occupancy rates above 98%. This occupancy should stay pretty consistent with a weighted average lease term of 7.3 years.
This industrial REIT made several strategic investments during the Panama Canal expansion project in order to accommodate the shipping companies taking advantage of the expanded port options with the larger waterway.
As far as the numbers go, Monmouth has a fairly healthy balance sheet with a debt-to-EBITDA ratio of 5.7x, and a sustainable adjusted funds from operation (AFFO) payout ratio of 85%.
The thing that makes me nervous about Monmouth, however, is that it is very dependent on FedEx Corporation (NYSE: FDX). FedEx and its subsidiaries account for 56.2% of Monmouth's annual rent revenue and occupy 45.8% of the REIT's rentable square footage.
Overall, I think Monmouth Real Estate Investment Corp. has an attractive price of a 17.8x FFO multiple. There is some significant growth on the horizon with this REIT. It has already acquired 1.1 million square feet of real estate in 2020, with another 1.1 million square feet in the pipeline. At the current price, I think it's a good buy for a growth REIT.
Plymouth Industrial REIT
Plymouth Industrial REIT (NYSE: PLYM) is one of the smallest publicly traded industrial REITs with a market cap of only $204.91 million. However, that's not to say it plans on staying there. This industrial REIT focuses on acquiring Class B properties in secondary markets in the eastern half of the United States. By focusing on this class of properties and these locations, it's able to acquire properties at higher cap rates and with more value-add opportunities.
Plymouth Industrial is on an aggressive growth path through acquisitions. After acquiring 2.19 million square feet of industrial space in the first quarter of 2020, its total square footage increased to approximately 20 million square feet across 96 properties.
With a high occupancy rate of 96%, 40% of its annual base rent is tied to leases that are expiring by the end of 2022. However, this may be an opportunity for Plymouth to increase the below-market rents in these properties. While this does present an additional risk, the company has done a great job at renewing leases and releasing vacant space.
Between 2018 and 2019, Plymouth had leases totalling 4,360,361 square feet set to expire. Of that, nearly 50% renewed with a 3.8% increase in rents. Another 2,141,098 square feet of that space was leased to new long-term tenants with a 17.8% increase in annual base rent. All together, these lease expirations resulted in a total annual rent increase of 9.3%.
Plymouth Industrial REIT has some obvious risks, especially with a debt-to-EBITDA ratio of 12.9. However, I believe the amount of leverage can be overlooked to some extent because of the fast pace of their acquisitions. Overall, I believe this high-dividend industrial REIT has a lot of growth ahead of them. With an FFO multiple of 8x, this REIT could provide investors with a lot of upside.
Industrial Logistics Property Trust
Industrial Logistics Property Trust (NASDAQ: ILPT) primarily invests in properties used as warehouse space and distribution centers. Industrial Logistics is a bit unique in that nearly 68% of their properties are ground leases. With a ground lease, the tenant only leases the land from the REIT. The tenant owns the building that sits on the leased land and is solely responsible for all the expenses that come along with the property.
The benefit to an investor with ground leases is that the tenant is much more likely to renew their lease when it expires. They have a lot of capital invested in the building, and they can't simply take it to the next piece of land. Ground leases typically have terms of 20 years or more, so they're normally a very stable investment.
Seventy-five percent of Industrial Logic's real estate assets are in Hawaii. This is also where all of its ground lease investments are. The remaining properties are in the contiguous United States. Sixty-four percent of the annual rental revenue from these mainland properties comes from investment-grade tenants or their subsidiaries.
The overall rental revenue should stay quite stable with their current properties. The weighted average lease term is 9.3 years. With the significant investments tenants have made in the properties, I expect the renewal rate will be much higher than average.
One of the primary risks with this industrial REIT is that it's so heavily reliant on its Hawaii portfolio, which accounts for 40% of annual rental revenue. Hawaii's economy has taken a larger hit than most other areas due to its reliance on tourism. Hawaii's Department of Business, Economic Development, and Tourism predicts its GDP won't recover to pre-pandemic levels until 2025.
However, with the long-weighted average lease term and the strength of the ground leases, Industrial Logic's Hawaii investments should survive through the state's economic downturn.
This REIT's growth strategy is focused around properties that will serve the demands of the growing needs of e-commerce companies. This growth strategy has been quite aggressive, with over $1 billion in acquisitions since their IPO in 2018. With an FFO multiple of 11.5, I see this industrial REIT as a value buy. I expect to see a steady increase in rental revenue and real estate assets over the next several years.