Industrial real estate is booming. Vacancy rates are the lowest on record and demand for industrial space has sent rental rates soaring. Robust long-term growth thanks to international supply chain issues and the growth of e-commerce means demand isn't slowing anytime soon. But investors who want to jump into this industry don't have many good options to choose from. Most real estate investment trusts (REITs), while still strong investments in their own respect, are richly valued right now. That is, aside from Plymouth Industrial REIT (PLYM -1.60%).
This newer industrial REIT, which specializes in the ownership and leasing of warehouses and small-to-midsize light industrial and small-bay warehouses , is getting a lot of investor attention after it outperformed all major peers in the industrial subsector last year. With shares now down 10% this year, let's take a closer look at whether investing in Plymouth Industrial REIT is a good move right now.
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A unicorn in the world of industrial REITs
Plymouth Industrial REIT is a unicorn in the world of industrial REITs for a few reasons. First, it is still a fairly small REIT, having a market cap of about $1 billion. By comparison, the next closest peer, Terreno Realty has a market cap of $5 billion. Second, the majority of the 183 properties in its portfolio, roughly 55%, are warehouses and distribution centers, but the remainder of its portfolio is invested in an often-overlooked and fragmented niche within the industrial subsector -- light industrial and small bays. This gives it unique exposure to small and mid-size local or regional manufacturing tenants.
Plymouth also benefits from being able to utilize a unique Umbrella Partnership Real Estate Investment Trust (UPREIT) structure to purchase new properties. This can be attractive for sellers because it allows them to defer capital gains taxes from the sale of a property to Plymouth. Instead of receiving cash at the sale, they receive operating partnership (OP) units that can be converted into common stock of Plymouth after a year or more.
The last factor that sets Plymouth apart is that it invests in secondary markets. Rather than focusing on the major metro markets that have limited space, high competition, and high barriers to entry, it focuses on smaller markets like Jacksonville, Florida; Columbus, Ohio; and Indianapolis, to name a few, where it has the potential for faster growth.
As of the third quarter of 2021, revenue had grown 30% year over year (YOY), and it added 5.1 million square feet to its portfolio after acquiring 17 properties. Plymouth Industrial is one of the best valued industrial REITs today, with a price-to-funds from operations (FFO) -- a key measure of REIT performance -- of 17 times. Most of its peers are above 30 times their price to FFO.
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A value buy with a major caveat
Most investors by this point would think investing in Plymouth Industrial REIT is a no-brainer. But before you invest, there are several risks to consider with this company. The first is that the company is operating at a net loss. Operating at a net loss isn't uncommon in the stock market. Tech stocks are notorious for achieving stellar growth despite operating at a loss, but it isn't as common in the world of REITs.
Ideally, Plymouth would be in the black. It's headed in the right direction, having reduced its earnings-per-share (EPS) loss by 47% in the third quarter of 2021 from a year earlier, and lowering it's net loss by 10% for the nine months ended Q3 2021. But it likely will take several more years before it reaches profitability. On the plus side, occupancy for its properties is a healthy 96.3% and rental rates have grown 10.8% YOY, a sign of solid demand. The key for the company will be to maintain growth during the new few years. It's in a fairly stable debt position with a debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 5.9 times and $78 million in cash and cash equivalents on hand.
I've had my eye on Plymouth for a while. I think its value at these prices is unrivaled for the exposure it gives investors to the industrial market. Once I clear trading restrictions, I will be investing in the company. I think long-term inventors looking for the next big industrial REIT should seriously consider Plymouth Industrial. Although it could take five to 10 years to really pay off, there's a lot of room to grow.
