When looking for a good deal, it sometimes makes the most sense to search in areas where others aren't looking. That's the ethos that drives Plymouth Industrial REIT (PLYM 0.53%), and what differentiates it from industry giants like Prologis (PLD 0.69%), which is focused on top-tier markets in key distribution hubs.
Looking at what might be called "B" markets has been a strong growth driver for the relatively young and tiny Plymouth. Here's why you might want to learn more about this real estate investment trust (REIT) today.
Another great place
Prologis has a giant global portfolio, but almost all of its assets are located in key distribution hubs, locations where goods arrive and get sorted and then shipped out to other areas. There's a huge amount of demand for the REIT's assets because of the vital role they play in global trade. Prologis has a very strong business model that has led to a long and successful corporate history. This is what might be called the "A" game in the industrial property sector.
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Plymouth is relatively tiny, coming in with a market cap of just under $1 billion, compared to Prologis' $120 billion. It simply can't compete at the same scale, and would likely be left with table scraps, at best, if it tried to fight for space in top-tier markets. That's why it doesn't, preferring instead to operate in "B" markets. These secondary regions don't generally have as many large industrial properties, and the competition is less fierce. In fact, being a public REIT likely gives Plymouth a leg up on the financing front over peers, many of whom are likely to be smaller and non-public entities.
That said, there's nothing inherently wrong with second-tier markets other than the fact that they lack the glamor of "A"-grade regions. For example, Plymouth management highlights that the second-tier markets it serves "enjoy higher affordability and lower average labor costs than Tier 1 markets" and "Tier II markets boast an industrial worker-to-business ratio of 4x those of Tier I markets." Meanwhile, the "availability of industrial space 20K -- 150K square feet has shrunk significantly as a percentage of total inventory over the last 20 years," with limited supply helping to push up rental rates. Roughly 70% of Plymouth's rent roll is concentrated in smaller properties, with its average tenant occupying just 65,000 square feet of space. Simply put, the REIT's focus on Tier II or "B" markets looks like a pretty attractive strategy.
The numbers add up for Plymouth
Just how good is Plymouth's approach? The REIT held its initial public offering (IPO) in mid-2017. When it reported second-quarter earnings that year, it owned a total of 20 properties accounting for 4 million square feet of space. At the end of the third quarter of 2022, the REIT's portfolio contained 207 properties totaling 33.8 million square feet of space. That's a material amount of growth in just five years or so.
The occupancy level at its IPO was 98.4%. Occupancy at the end of the third quarter of 2022 was 98.8%. Although it dipped at various points in between those two dates, demand clearly remains strong even as the company has grown. This fact is further bolstered by the rental growth Plymouth has seen. In three of the five full calendar years of its existence, releasing spreads have been north of 10%. Even in 2020, which was affected by the emergence of the coronavirus pandemic, releasing spreads were up in the high single digits.
For dividend investors, however, there's a bit of a wrinkle. In 2020, Plymouth reset its dividend, cutting it by roughly 45%. When the REIT first went public, management was probably hoping to attract attention with a relatively high dividend payment. As 2020 unfolded and the coronavirus pandemic quickly spread, a more cautious approach obviously made greater sense. The dividend has been increased twice since the cut. It appears likely that Plymouth is now on a slow and steady growth path with its business and dividend from here.
There's a risk in that assumption, to be sure, so this stock may not be the best option for risk-averse investors. However, given the strong performance of the REIT's portfolio and the ongoing acquisition growth it has achieved, Plymouth seems like an attractive growth and income play for more aggressive types.
Plymouth is playing a different game
There's a clear reason to like REITs that own the best properties in the best markets, like Prologis. But that's not the only way to invest. Plymouth is steadily building its business in second-tier markets as it successfully executes the "B" game. With a current dividend yield of 3.8% (Prologis' yield is just 2.4%) and two dividend hikes since 2020's cut, investors looking to add some industrial REIT exposure to their portfolio should definitely take a closer look at Plymouth.