Same same but different

Except for shared business objectives, industrial REITS are a heterogeneous collection of companies

July 7, 2016

About the author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Between 2010 and 2020, Ganel worked for Silvergate as Vice President in Capital Markets. He provides advisory services to family offices,  private companies, and financial advisors.

If you are looking for a second opinion, especially when considering big changes to your portfolio or strategy. Unbiased, professional insights can help you reexamine your assumptions and reduce emotional decisions.

Join the waitlist to learn more.

‍Increasing cash flow, developing industrial properties, and recycling building portfolio are common business objectives for industrial Real Estate Investment Trusts. By maintaining strong relationships, controlling operating expenses, and actively leasing space, objective one is met. By selecting markets with strong tenant demands and low vacancy rates, the second objective is met. The third objective, recycling buildings, is the redeployment of sale proceeds into higher growth acquisition and developments.  

But on the company level each industrial REIT is unique. One company management may boast that its ability, experience, and commitment is unparalleled. Another may pride the strong industry relationships, its network of industry relationships with both brokers and investors. Another distinguishing factor is the industrial properties portfolio. The real estate portfolio, in terms of quality, location, appeal, leasing schedule, and tenant exposure, is always peculiar.  

So are the risks. Business and operating risks are as the reliance on key personnel or that development strategies may not be successful. Real estate risk is the dependency on customers for revenue. Debt financing risk is the inability to service debt or meet certain covenants in the credit agreements.  Corporate risk stems from the REIT’s ability to issue stock without shareholder consent (diluting the investor interest), and the board of directors ability to take actions without stockholder approval, notes Keith Jurow of Advisor Perspectives, a newsletter. 

a description of industrial REITs in the NAREIT index balance sheet and earnings
Source: Company 10-K filings

Industrial REITS are different based on the geographic distribution, lease expiration schedule, industry diversification, customer diversification, and indebtedness. Geographic distribution describes the location, number, and size of the portfolio. Lease expiration schedule affects how fast management will be able to increase lease rates. Industry diversification describes the business of the tenants. Industry diversification describes the kind of tenants. Ranging from wholesale trade, retail trade, to health and social assistance. 

 Working capital and funding resources for potential capital requirements are unique. There are six common sources: (1) cash flow from operations, (2) gains on sale, (3) secured and unsecured financing, (4) equity issuance, (5) cash position, and (6) distribution from joint-partnerships.

And the financing strategy is different as well. Without a bylaw limiting indebtedness levels, industrial REITs management operate as other investment grade peers in the real estate industry. Indebtedness includes debt issuance, line of credit, and contractual obligations. Debt issuance relates to mortgages outstanding, both fixed- and variable-rate interest. Lines of credit are unsecured revolving credit facilities. Contractual obligations are operating lease agreement and ground lease agreement.  

Expected, perhaps, the 11 Industrial REITs in the NAREIT Index are different in asset size, competitive advantage, and return yield. Asset size ranges from $916 million to $31 billion with an average of $5.5 billion and a median of $2.5 billion. Leverage ranges from 24% to 67% of assets. The yield ranges from 1.89 percent to 5.91 percent, with an average yield of 3.4 percent.