Plymouth Industrial REIT (PLYM -2.39%) is down roughly 34% off recent highs. Broader market volatility and a growing concern over recessionary impacts on industrial operators have turned a lot of investors off of this once top-performing industrial real estate investment trust (REIT), given that the company has yet to turn a profit.
But a recent report looking at the state of the industrial industry could completely change your opinion of the company and its future, starting with these three words.
1. Location
The "Golden Triangle" is an area of the U.S. that Plymouth has coined in its investor presentations and includes portions of the Southeast, Northeast, and Midwest and is home to roughly 70% of the U.S. population. For industrial real estate, it's a powerhouse region that helps serve the largest concentration of ports in the country, has access to five of the seven major railway paths, and accounts for more than half of the U.S. GDP.
Plymouth largely operates in the Golden Triangle, having roughly 32 million square feet of industrial space in this region. Cities where Plymouth owns and leases industrial space in the Golden Triangle, like Chicago, have seen year-over-year industrial rents grow by 16.9%. Memphis, another hot spot for Plymouth, has seen rents grow by 10%.
This region is known for having the largest supply of industrial real estate, which means its rents aren't growing as rapidly or dramatically as its coastal competitors. But there's no denying it plays an absolutely critical role in our global economy, and demand for industrial real estate should remain stable for that reason.
2. Category
Tier II markets are smaller but notably sized cities. Think Kansas City, Jacksonville, St. Louis, and Cincinnati -- not Seattle, San Francisco, Miami, or New York City, which are considered Tier I, or gateway, markets. These small-but-growing markets are often deeply rooted in manufacturing, industrial, logistics, and local and global distribution.
The higher cost of living and the ability of many employees to work remotely has pushed a growing number of residents into Tier II cities. It's expected that population growth in these areas will outpace the growth in many Tier I markets, taking the industrial warehouse workforce and demand for closer distribution centers to these smaller regions.
This is great news for Plymouth Industrial REIT, which almost exclusively invests in Tier II markets. Aside from the lower cost of living, more affordable wages for its workers, and less competition, Tier II markets also have cheaper real estate, making acquisitions more affordable for Plymouth.
3. Size
Most industrial REITs focus on mid-sized to large industrial warehouses ranging from 150,000 square feet to 500,000 square feet and up. But not Plymouth. Plymouth Industrial REIT specializes in small to mid-sized industrial bays, which range from 20,000 square feet to 250,000 feet, a major advantage in the Tier II markets it operates in.
Deliveries of new industrial space for Tier II markets over the last year have predominately been large-sized warehouses, which don't serve the primary demand in these regions, which is small to mid-size industrial bays. Tier II markets see six times the amount of leasing activity for space under 150,000 square feet than footprints larger than that.
Industrial real estate is a hot commodity right now regardless of size or market, but there are advantages to serving the smaller, regional players. And that is something that gives Plymouth a major upper hand as it grows its portfolio.
Its latest earnings for the second quarter of 2022 were positive, showing growth in all key metrics for a REIT, including revenues, funds from operations (FFO), net operating income (NOI), and earnings before interest, taxes, amortization, and depreciation (EBITDA). The company still isn't profitable as of yet, but it's moving in the right direction, and the REIT is taking action to improve its ownership positions in its top-performing markets.
Long-term investors who are looking for a good growth opportunity as the stock market makes a comeback should consider Plymouth Industrial REIT given today's discounted price. While it could take several years for an investment in Plymouth to pay off, investors can still benefit from its 4% dividend yield.
