Industrial REITs: Amazon Cuts Deep – Seeking Alpha

Industrial REITs: Amazon Cuts Deep – Seeking Alpha

Large Amazon distribution warehouse

georgeclerk/iStock Unreleased via Getty Images

georgeclerk/iStock Unreleased via Getty Images
This is an abridged version of the full report published on Hoya Capital Income Builder Marketplace on May 22nd.

industrial REIT investing 2021

Hoya Capital

Hoya Capital
Industrial REITs – a perennial performance leader in recent years – have been slammed over the past month with declines of 20-30% after e-commerce giant Amazon (AMZN) announced plans to cut costs in its logistics network, pumping the brakes on its aggressive pandemic-fueled footprint expansion amid rising transportation costs and slowing consumer spending, seeking to reduce overcapacity through sublets and renegotiated leases. The downbeat Amazon report followed an otherwise stellar slate of industrial REIT earnings reports highlighted by incredible 30% rent growth, record-low reported vacancy rates and overshadowed several major M&A developments. In the Hoya Capital Industrial REIT Index, we track the thirteen industrial REITs which collectively total nearly $160 billion in market value.

industrial REITs 2022

Hoya Capital

Hoya Capital
Led by sector stalwart Prologis (PLD), industrial have consistently delivered dividend and FFO growth near the top of the REIT sector over the past decade, but Amazon’s somewhat surprising report seemed to call into question the “extreme competition” for logistics and distribution space noted in the prior quarter. But while the e-commerce giant is indeed the largest industrial REIT tenant, Amazon still comprises just 3-5% of total occupied space. As a percent of NOI, REIT-specific exposure ranges from a low of 1% at EastGroup (EGP) to a high of 8% at Industrial Logistics (ILPT). For industry insiders, Amazon’s plans to scale back its expansion were not unexpected. Supply chain consulting firm MWPVL International estimates that Amazon increased its square footage by nearly 400% between 2016 and 2021 – and doubled in 2020 and 2021 alone – and had forecasted a moderation in its expansion plans in 2022 and 2023. Despite this major push, Amazon still represented a relatively modest 14% of incremental absorption in 2021 and 7% YTD so far this year.

amazon logistics demand

Hoya Capital

Hoya Capital
These much-discussed overcapacity issues appear to be company-specific as broader industrial vacancy rates remain at record lows. Riding the e-commerce revolution – a wave that has been given an added accelerant by the significant pandemic-related disruptions, industrial REITs have delivered relentless outperformance over the past half-decade, riding similar compelling structural tailwinds of low supply and robust demand as the U.S. housing industry. Robust demand for logistics space has been driven by dueling trends of the “need for speed” in both business-to-consumer and business-to-business goods delivery and, more recently, by the critical need for enhanced supply chain resiliency. Brokerage firms CBRE and JLL each separately reported that industrial vacancy rates declined to record-lows below 4% in Q1 2022 despite robust levels of new development and weaker demand from Amazon.

industrial REIT vacancy

Hoya Capital

Hoya Capital
Encouragingly, responding to the Amazon reports and questions this week, Prologis reiterated its full-year demand outlook and expect rent growth of over 20% and record-low year-end vacancy rates of 3.3% this year, citing “clear constraint on supply” and noting that “logistics market conditions are still defined by historic low vacancy, constraints on new deliveries, and pent-up demand.” Prologis commented that it is “watchful on rising levels of consumer stress and modeled -5% real growth in retail goods sales in our Q1 2022 earnings call” but noted that “space is effectively sold out” with record-low vacancy rates. Prologis estimates that the market is experiencing more than 800 million square feet of pent-up incremental demand even with this pullback, but only 375 MSF will come online in 2022 to meet this demand.

industrial supply demand

Hoya Capital

Hoya Capital
As analyzed in our REIT Earnings Recap, six of the seven REITs that provide guidance raised their full-year FFO growth outlook including Prologis, First Industrial (FR), and Duke Realty (DRE) which all reported a remarkable surge in rent growth and raised their full-year outlook. PLD noted that its average rents on existing leases are 47% below market, equating to $2 per share of embedded earnings growth as these leases renew at current market rates. Rexford (REXR) was also an upside standout, raising its full-year FFO growth outlook to 13.4%, driven by an incredible 71% jump in renewal spreads. On average across the industrial sector, GAAP renewal spreads surged more than 35% in Q1 while cash spreads rose nearly 20% – each the highest quarterly rent growth on record.

industrial REIT leasing spreads

Hoya Capital

Hoya Capital
A pair of emerging mid-cap industrial REITs also reported impressive results as Terreno (TRNO) recorded cash spreads of 34.8% in Q1 while increasing occupancy to record-highs at 96.9% while EastGroup (EGP) recorded leasing spreads of 33.5% and raised its FFO growth of 10.8% in 2022 – up 190 basis points from its prior outlook. Even Americold (COLD) – which has been among the worst-performing industrial REITs amid operational challenges in its services-heavy business model – boosted its full-year property-level outlook which now calls for a 2.0% increase in NOI. Unlike other industrial REITs that simply rent the space, COLD feels the supply chain disruptions directly and noted that it continues to face “very challenged” conditions across the global food supply chain. Net lease-focused STAG Industrial (STAG) is also slowly but surely starting to see positive mark-to-market rent growth effects as its long-duration leases come up for renewal.

industrial REIT fundamentals

Hoya Capital

Hoya Capital
While the property-level metrics remain stellar, some industrial REITs are still figuring out how to get out of their own way. LXP Industrial (LXP) still expects a decline in full-year FFO growth of nearly 15% as it seeks to sell its last remaining office assets as part of its transition to become a pure-play industrial REIT. LXP also announced that it is no longer pursuing a sale of the company, citing “the significant changes to macroeconomic, geopolitical and financing conditions since it commended the process in early February. Another smaller industrial REIT, Industrial Logistics (ILPT) reported disappointingly slow progress in its plan to reduce its debt by selling assets from its recently-acquired Monmouth portfolio and an FFO drag from its bridge loan being used to finance the deal.

industrial REIT FFO growth

Hoya Capital

Hoya Capital
On that note, while some smaller industrial REITs are facing challenges with portfolio repositioning, several mid-cap REITs are enjoying a fertile and active M&A environment. Earlier this month, Prologis proposed to acquire Duke Realty in an all-stock deal at a 29% premium to Duke Realty’s closing price on the same date. Duke subsequently rejected the offer, noting that it was “virtually unchanged” from prior proposals and is “insufficient,” but remains “open to exploring all paths to maximize shareholder value.” Prologis has been far and away the most active acquirer over the past half-decade with major acquisitions of DCT Industrial in 2018 for roughly $8B, Industrial Property Trust in 2019 for $4B, and Liberty Property Trust in 2020 for $13B.

industrial REIT m&A activity

Hoya Capital

Hoya Capital
Prologis has been actively pursuing Duke for at least six months and Duke previously rejected two proposals – the first one coming on November 29th. Under the terms of yesterday’s proposal, Duke Realty stockholders would own 19% of the combined company. The Prologis offer for Duke – which we believe would benefit both companies if completed at the right price – came two weeks after another major industrial real estate acquiror – Blackstone (BX) – scooped up PS Business Parks (PSB) at $187.50 – a 12% premium to its prior closing price. For Blackstone – which oversees a massive conglomerate of real estate investment vehicles including the largest non-traded REIT – the deal is the fifth since last June following acquisitions of residential REITs American Campus (ACC), Preferred Apartment (APTS), Bluerock Residential (BRG), and data center REIT QTS Realty Trust (QTS).

M&A REITs

Hoya Capital

Hoya Capital
Industrial REITs continue to see significant value-add opportunities in ground-up development with development yields averaging 6-8% compared to cap rates between 4% and 6%. While industrial supply growth is averaging roughly 2-3% per year, this is still shy of the mid-single-digit supply growth rates seen in other property sectors including data centers in response to a period of strong rental growth. Trends over the past three years lead us to believe that there are mounting barriers to entry and supply constraints. Industrial REITs have built up a sizable land bank over the last decade and are now responsible for a significant percentage of total industrial real estate development.

industrial REIT development pipeline

Hoya Capital

Hoya Capital
On the front lines of the historic supply-chain shortages, Industrial REITs outperformed the broad-based REIT Index for the sixth consecutive year in 2021, but have uncharacteristically lagged in early 2022 in the wake of the Amazon report and amid a broader growth-to-value rotation within the REIT sector. Industrial REITs are now lower by more than 26% so far on the year, trailing the 17.3% decline from the broad-based Vanguard Real Estate ETF (VNQ) and the 16.4% decline from the S&P 500 ETF (SPY).

industrial REITs 2021 32

Hoya Capital

Hoya Capital
These declines, however, come after recording a remarkable sixth straight year of outperformance in 2021, a streak that trails only the manufactured housing sector, which has delivered an unprecedented nine-straight years of outperformance. The carnage this year has been widespread across the sector with every industrial REIT lower by more than 20% YTD with the exception of PS Business Parks. Small-cap REITs have been slammed particularly hard with Plymouth and Industrial Logistics each dipping roughly 40% – a sharp reversal from last quarter in which these smaller-cap names were among the sector leaders on the year. As noted, however, the brutal year follows one of the strongest for industrial REITs as twelve of the thirteen industrial REITs delivered positive total returns in 2021 with Americold as the lone exception.

industrial REIT performance

Hoya Capital

Hoya Capital
Industrial REITs own roughly 5-10% of total industrial real estate assets in the United States but own a higher relative percentage of higher-value distribution-focused assets with building sizes averaging around 200,000 square feet, which have seen significant rent growth and more favorable supply/demand conditions due to tangible constraints on land availability. Robust demand for space over the past decade has been driven by a relentless “need for speed” arms race as retailers and logistics providers have invested heavily in supply chain densification and physical distribution networks.

industrial REITs

Hoya Capital

Hoya Capital
Prologis segments industrial real estate assets into four major segments: Multi-Market Distribution, Gateway Distribution, City Distribution, and Last-Touch Centers. Along that continuum towards the end-consumer, the relative value of these properties (on a per square foot basis) increases, as do the underlying barriers to entry due to scarcity of permittable land. Rent growth has been most robust over the last half-decade in the segments closer to the end-consumer – typically occupied by distributors like UPS (UPS), and FedEx (FDX) – a trend that has been further accelerated by the pandemic.

logitics supply chain

Hoya Capital

Hoya Capital
Supply chain disruptions came as inventory levels were already historically lean amid a shift towards “just-in-time” inventory management. Resilient supply chains will require substantial investments in logistics space with Prologis pegging the number at 800 million extra square feet just to reach equilibrium. Prologis noted last month that the utilization rate edged up into the mid-85 percent range in November and December and while utilization is below its historic high of 87 percent, the inventory-to-sales ratio is more than 10 percent below pre-pandemic levels and there is no “shadow space” to absorb inventory right-sizing.

logistics reits

Hoya Capital

Hoya Capital
These “just-in-case” trends are additive to the pre-existing “need for speed” trends which continue to be driven most prominently by e-commerce giant Amazon and increasingly by Walmart (WMT), Target (TGT), Home Depot (HD), and Lowe’s (LOW). The pandemic significantly accelerated the penetration rate of e-commerce, which requires up to three times more logistics space than sales through traditional brick and mortar sales. A potential double-edged sword for industrial REITs, the shortage of industrial space itself has driven investments into logistics technologies that could eventually lead to higher levels of space efficiency, higher utilization rates, and eventually could marginally reduce the need for physical space.

e-commerce REITs

Hoya Capital

Hoya Capital
Appreciated more for their dividend growth than their current yields, industrial REITs pay an average dividend yield of 2.7%, which is below the REIT average of roughly 3.2%. However, it’s important to note that Industrial REITs have grown both dividend distributions and FFO by nearly 10% per year since 2014, significantly higher than the REIT sector average of roughly 4%. Industrial REITs pay out roughly 60% of their available free cash flow, leaving an ample cushion for development-fueled growth and future dividend increases.

industrial REIT dividend yield

Hoya Capital

Hoya Capital
Within the sector, we note the varying strategies of the thirteen industrial REITs where the “tradeoff” between high current yield and long-term dividend growth becomes quite apparent. The four “Yield REITs” at the top of the chart pay an average current yield between 3.5%-9.4% but have seen their dividends grow at slower rates. On the other hand, the remaining eight “Growth REITs” pay an average dividend yield of around 2.3% but have seen their dividends grow by an average of 10% per year over the past five years.

industrial REIT dividend yield

Hoya Capital

Hoya Capital
Industrial REITs – a perennial performance leader in recent years – have been slammed over the past month with declines of 20-30% after Amazon announced plans to cut costs in its logistics network. The largest industrial REIT tenant, Amazon still comprises just 3-5% of total occupied space. These overcapacity issues appear to be company-specific as broader industrial vacancy rates remain at record lows. The sour Amazon report followed an otherwise stellar slate of industrial REIT earnings reports – highlighted by incredible rent growth averaging over 30% – and overshadowed several major M&A developments. We had trimmed our industrial REIT exposure prior to this sell-off given the previously lofty valuations, but the recent carnage is an opportunity to double-down on several dividend champions. We believe that premium valuations are warranted given the secular tailwinds of limited supply and robust demand which should persist into the back half of this decade.

valuations NOIO

Hoya Capital

Hoya Capital
For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Farmland, Storage, Timber, Mortgage, and Cannabis.
Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

high dividend yield index

Hoya Capital

Hoya Capital
Amid the historic market volatility – and persistent inflation – our focus at Income Builder is on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Get started today with a Free Two-Week Trial and you can take a look at our top ideas – including our new Landowner Portfolio – and see what we’re investing in to help build sustainable portfolio income.

Members gain complete access to our investment research and our suite of trackers and exclusive income-focused portfolios targeting premium dividend yields up to 10% across real income-producing asset classes. 

This article was written by
High YieldDividend Growth • Income. Visit www.HoyaCapital.com for more information and important disclosures. Hoya Capital Research is an affiliate of Hoya Capital Real Estate (“Hoya Capital”), a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. 

Collaborating with ETF Monkey, Retired Investor, Gen Alpha, Alex MansourThe Sunday Investor, and Philip Eric Jones for Marketplace service – Hoya Capital Income Builder. 
Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Neither the information, nor any opinion, contained on this website or any published commentary by Hoya Capital constitutes a solicitation or offer by Hoya Capital or its affiliates to buy or sell any securities, nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. No representation or warranty is made as to the efficacy of any particular strategy or fund, or the actual returns that may be achieved.
Investing involves risk. Loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks. Real estate companies, including REITs, may have limited financial resources, may trade less frequently and in limited volume, and may be more volatile than other securities. Many factors may affect real estate values, including the availability of mortgages and changes in interest rates. Real estate companies are also subject to heavy cash flow dependency, defaults by borrowers, and self-liquidation. The housing industry can be significantly affected by the real estate markets. Compared to large-cap companies, small and mid-capitalizations companies may be less stable and their securities may be more volatile and less liquid.

There are also unique risks associated with investing in ETFs. Shares may be bought and sold in the secondary market at market prices and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Although it is expected that the market price of an ETF will approximate the Fund’s NAV, there may be times when the market price of an ETF is more than the NAV intra-day (premium) or less than the NAV intra-day (discount) due to supply and demand of the ETF or during periods of market volatility.

Before acquiring the shares of an ETF, it is your responsibility to read the fund’s prospectus. The prospectus to the ETFs in which Hoya Capital advises are available at www.HoyaETFs.com.

An investor cannot invest directly in an index. Index performance does not reflect the deduction of any fees, expenses, or taxes. The information and any index data presented do not reflect the performance of any fund or other strategies or accounts managed or serviced by Hoya Capital, and there is no guarantee that investors will experience the type of performance reflected.

Data quoted represents past performance, which is no guarantee of future results. The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. There is no guarantee that any historical trend illustrated will be repeated in the future, and there is no way to predict precisely when such a trend will begin.
Commentary and data are believed to be accurate, but we cannot guarantee it’s accuracy. We do not represent that it is a complete analysis of all factors and risks. It should not be relied upon as the sole source of suitability for any investment. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.
Decisions based on information contained on this site or any commentary published by Hoya Capital are the sole responsibility of the reader, and in exchange for using this website or reading any published commentary, the reader agrees to hold Hoya Capital harmless against any claims for damages arising from any decisions that the reader makes based on such information.
Hoya Capital has no business relationship with any company discussed/mentioned. Hoya Capital never receives compensation from any company discussed/mentioned. Hoya Capital, its affiliates, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com.
Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, PLD, DRE, STAG, ILPT, FR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Hoya Capital Real Estate (“Hoya Capital”) is a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns.

A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital’s Seeking Alpha Profile Page. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks.

Data quoted represents past performance, which is no guarantee of future results. It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities.

Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com.

source


Leave a Reply

Your email address will not be published.