Industrial real estate is one of the fastest-growing sectors in commercial real estate (CRE). These properties, including warehouse, logistics, and distribution centers; cold storage; and manufacturing facilities, are in high demand as e-commerce demand exceeds supply.
Year-over-year (YOY) e-commerce growth reached 44.5% in the second quarter of 2020, and net absorption for industrial properties is expected to reach new highs at 250 million square feet, according to CBRE.
The accelerated growth and long-term trends favoring industrial real estate mean it's an appealing asset class to invest in. Still, it's also a challenging and expensive one to participate in for everyday investors. That's why a lot of investors look to real estate investment trusts (REITs) as a way to participate in this solid sector.
Many choose to focus on the larger industrial REITs when targeting investments in this sector, but smaller up-and-coming REITs, such as Lexington Realty Trust (NYSE: LXP), are worth looking into as well. Here's a closer look at the company.
Lexington Realty Trust company profile
Lexington Realty Trust became a publicly traded REIT in 1993, originally owning a diversified portfolio of assets in the commercial sector. The company, however, decided to shift its investment model in 2017 to focus exclusively on the development, acquisition, and management of Class A industrial real estate.
Today, as of Q1 2021, the company owns or has interest in 132 properties across eight states, with 115 of those properties -- roughly 91% of its portfolio -- being industrial real estate. Of those, 81% are warehouse and distribution centers, followed by manufacturing facilities at 8%, light manufacturing at 6%, and cold storage at 5%.
The company owns facilities in the Sun Belt, Midwest, and Northeast regions of the U.S., with 60% of its portfolio being located in the top 25 metro markets for industrial real estate. Lexington's top 10 markets based on percentage of rents are:
- Memphis, Tennessee
- Greenville/Spartanburg, South Carolina
- Dallas-Fort Worth, Texas
- Cincinnati/Dayton, Ohio
- Nashville, Tennessee
Lexington's legacy portfolio, which includes assets outside of the industrial umbrella, accounts for 11.7% of its annual base rent (ABR) and is primarily office space. Its industrial portfolio makes up the remaining 88.3% of its ABR and operates on single-tenant net leases. Of the company's rental income, 51% is derived from institutional-grade tenants such as Amazon, Nissan, Dana, Kellogg, FedEx, and Walmart.
Lexington has a varied tenant base across multiple industries, although its top-netting industries are:
- Consumer products
- Transportation and logistics
- Construction and materials
Lexington Realty Trust news
Lexington Realty Trust's latest earnings report for Q1 2021 showed some positive improvements for the company, with not only a 133% increase in net earnings YOY and a 16% jump in funds from operations (FFO) but also a decrease in the debt-to-EBITDA ratio from 5.5 times to 4.6 times -- a healthy range by most REIT standards.
In Q1 2020, the company completed $51 million worth of industrial acquisitions, including three properties in Central Florida and Indianapolis; leased 1.5 million square feet of space, bringing its portfolio to 97.8% leased; and delivered a 320,190-square-foot warehouse in Columbus, Ohio.
Lexington has four active developments underway, which will add an estimated 3.5 million square feet to the company's portfolio. Two of the developments, located in Atlanta and Phoenix, are set to complete in 2021, with the remaining properties in Indianapolis and Central Florida being completed in 2022.
As of Q1, the company's average lease term is 7.7 years and cash base rentals have increased 9.45% on average over the past year. The company has a steady lease rollover period spanning primarily from 2024 to 2030. This means that new developments will be a driving factor for rental increases and revenue growth in the interim.
No major debt maturities are due until 2024, and Lexington has a sizable $600 million in cash and cash equivalents available, including a credit facility.
Lexington Realty Trust stock price
Transitioning a portfolio isn't easy, and it's a big reason the company's share prices and returns haven't grown as impressively as other industrial REITs. Share prices for the company have remained rather flat over the past five years, with a 3.89% share price growth.
The March 2020 market crash didn't have the huge impact on Lexington that it did on other REITs, likely due to its size and being overshadowed by larger industrial REITs. Currently, the company's price-to-FFO ratio is 16 times, meaning it's slightly undervalued for its performance -- something that's hard to come by in the highly sought-after industrial sector.