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This is an abridged edition of the full Report on Hoya Capital Income Builder Marketplace on May 22.
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Industrial REITs, leaders in sustainable functionality in recent years, have been criticized over the past month with drops of 20 to 30% after e-commerce giant Amazon (AMZN) announced plans to cut prices on its logistics network, restricting its competitive expansion of the pandemic-fueled footprint amid emerging shipping prices and slowing customer spending. seeking to decrease excess capacity through renegotiated subletting and leases. vacuum rates and eclipsed several primary M&A developments. In Hoya Capital’s industrial REIT index, we track the 13 trading REITs that, collectively, have a market value of about $160 billion.
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Led by industry stalwart Prologis (PLD), the commercials have consistently delivered dividends and FFO expansion close to the most sensitive in the REIT sector over the past decade, but the surprise report from Amazon seemed to put the spotlight back on the table. consult the “extreme competition” in the area of logistics and distribution observed in the last quarter. But while the e-commerce giant is, in fact, the largest commercial REIT tenant, Amazon still accounts for only 3-5% of the total occupied area. As a percentage of NOI, express exposure to REITs ranges from a low of 1% at EastGroup (EGP) to a high of 8% at Industrial Logistics (ILPT). To industry insiders, Amazon’s plans to curtail expansion were not unexpected. Supply chain consultancy MWPVL International estimates that Amazon increased its acreage by nearly 400% between 2016 and 2021, doubling in 2020 and 2021 alone, and expected a moderation in its expansion plans. expansion in 2022 and 2023. Despite this headline push, Amazon still accounted for a relatively modest additional takeover of 14% in 2021 and 7% year-to-date.
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These much-discussed overcapacity issues appear to be company-specific, as broader commercial vacuum rates remain at record degrees. Riding the e-commerce revolution, a wave that has gained even more momentum due to significant pandemic-like disruptions, commercial REITs have delivered relentless outperformance over the past decade, taking credit for similar convincing structural tailwinds from weak sources and physically powerful demand like the housing industry in the United States. for speed” in delivering goods from business to customer and business to business and, more recently, through the critical need for greater supply chain resilience. Brokerage firms CBRE and JLL reported that trade vacuum rates fell to record levels below 4%. in the first quarter of 2022 despite physically strong levels of further gains and weaker demand from North Amazo.
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Encouragingly, responding to Amazon’s reports and questions this week, Prologis reiterated its full-year outlook call and expects hiring expansion of more than 20% and record year-end unemployment rates of 3. 3% this year, posing a “clear source constraint. “”and noted that “logistics market situations are still explained by the old low vacuum, limitations on new deliveries, and pent-up demand. “Prologis said it was “alert to emerging levels of customer tension and modeled a real retail sales expansion of -5% our first quarter 2022 earnings call,” but noted that “the space is well depleted” with record vacuum rates. 375 SPS measures will be brought online in 2022 to meet this call.
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As discussed in our SUMMARY of REIT earnings, six of the seven REITs providing management services have increased their FFO expansion prospects for the full year, adding Prologis, First Industrial (FR) and Duke Realty (DRE), who have reported a notable build-up in hiring expansion and improved outlook for the full year. LDP noted that its average hires on existing rentals are 47% below the market, which equates to $2 according to the steady percentage of expansion of built-in earnings when those rentals are renewed at current rental market rates. Rexford (REXR) also stood out on the upside, raising its full-year FFO expansion outlook to 13. 4%, thanks to a 71% increase in renewal spreads. On average, in the commercial sector, GAAP renewal spreads increased more than 35% in the first quarter, while money spreads increased by nearly 20%, each representing the most powerful quarterly hiring expansion on record.
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A pair of emerging mid-cap commercial REITs also posted impressive results, with Land (TRNO) posting money spreads of 34. 8% in the first quarter while expanding occupancy to record levels of 96. 9. %, while EastGroup (EGP) registered large gaps of 33. 5% and increased its occupancy rate. FFO expansion of 10. 8% in 2022, 190 more core issues than its previous outlook. Even Americold (COLD), which has been among the worst-performing commercial REITs amid the demanding operating situations of its heavy-duty business style, has boosted its full-year real estate outlook, which now forecasts a 2. 0 build. % in NOI. Unlike other commercial REITs that only contract space, COLD is feeling the source chain disruptions firsthand and noted that it continues to face “very difficult” situations throughout the source chain. world food source. STAG Industrial (STAG), focused on net leasing, is also slowly starting to see positive effects on rental expansion in the market as its long-term leases come to an end.
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While property-level measures are still excellent, some commercial REITs are still looking to get out of their own way. LXP Industrial (LXP) still expects FFO’s full-year expansion to slow by about 15%, as it looks to sell its last remaining. workplace assets as part of your transition to a pure business REIT. Another small commercial REIT, Industrial Logistics (ILPT) reported disappointing progress on its plan to reduce its debt by promoting assets from its recently acquired Monmouth portfolio and an FFO carry-over of its bridge loan used to finance the transaction.
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In that sense, while some small commercial REITs face portfolio repositioning challenges, several mid-cap REITs gain advantages from a fertile and active M&A environment. Earlier this month, Prologis proposed getting Duke Realty into a stock transaction at a 29% premium. to the final value of Duke Realty on the same date. Duke later rejected the offer, noting that it has “virtually unchanged” compared to other proposals and that it is “insufficient,” but remains “open to exploring all avenues to maximize shareholder value. “the highest active profit over the past half-decade with major acquisitions of DCT Industrial in 2018 for around $8 billion, Industrial Property Trust in 2019 for $4 billion and Liberty Property Trust in 2020 for $13 billion.
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Prologis has been actively pursuing Duke for at least six months and Duke has in the past rejected two proposals, the first on November 29. Under the terms of yesterday’s proposal, Duke Realty shareholders would own 19% of the combined company. Duke’s offer, which we would make profit for businesses if made at the right price, came two weeks after another major commercial real estate client, Blackstone (BX), bought PS Business Parks (PSB) at $187. 50, or 12 percent premium to its previous final value. For Blackstone, which oversees a massive conglomerate of real estate investment vehicles, adding the largest unlisted REIT, the deal is the fifth since last June after acquisitions of American Campus (ACC), Preferred Apartment (APTS), Bluerock Residential (BRG) and QTS Realty Trust’s (QTS) REIT knowledge center.
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Industrial REITs continue to see significant value-added opportunities progressing from the ground up, with average progression returns of 6-8% compared to capitalization rates between 4% and 6%. While commercial source expansion averages around 2-3% consistent with the year, it is still below the average single-digit source expansion rates seen in other real estate sectors, adding knowledge centers, in reaction to a steady period of strong hiring expansion. Trends over the last 3 years lead us to the fact that access barriers and source restrictions are multiplying. Industrial REITs have accumulated a significant reserve of land over the past decade and are now to blame for a significant and steady percentage of overall commercial real estate growth.
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On the front lines of the old source chain shortage, commercial REITs surpassed the overall REIT index for the sixth consecutive year in 2021, but lagged behind in early 2022 in the wake of Amazon’s report and opposed a context of broader value turnover expansion within the REIT industry. Industrial REITs are now down more than 26% since the start of the year, behind the 17. 3% decline in Vanguard Broad-based Real Estate ETFs (QNVs) and the 16. 4% decline in S ETFs.
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However, these declines come after recording a remarkable sixth consecutive year of outperformance in 2021, a series that follows only the manufactured home sector, which has recorded nine consecutive years of unprecedented outperformance. This year’s carnage has been widespread across the industry, with one and both commercial REITs falling more than 20% since the start of the year, with the exception of PS business parks. quarter in which those small-cap names were among the industry leaders during the year. However, as noted, the difficult year follows one of the most powerful for commercial REITs, with twelve of the 13 commercial REITs generating positive overall returns in 2021, with Americold being the only exception.
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Industrial REITs own about 5 to 10% of the overall commercial real estate assets in the U. S. But possess a higher relative percentage of distribution-focused value-added assets with construction sizes averaging around 200,000 square feet, which have experienced significant rental expansion and more favorable situations. The main area call over the past decade has been driven through an incessant arms race of “need for speed”, with stores and logistics providers making a heavy investment in source Chain densification networks and physical distribution.
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Prologis segments commercial real estate assets into 4 main segments: multi-market distribution, gateway distribution, urban distribution and last contact centers. Throughout this continuum to the end customer, the relative price of those homes (on a constant square foot basis) increases, as do the underlying barriers to access due to the scarcity of land consistent with that allowed. Rental expansion has been physically more powerful over the past half-decade in the segments closest to the end customer, occupied by vendors such as UPS and FedEx. (FDX): a finish that has accelerated further during the pandemic.
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The supply chain disruptions came at a time when stock levels were already traditionally low as part of a shift to “just-in-time” stock management. in another 800 million square feet just to achieve balance. Prologis noted last month that the usage rate increased in the mid-range of 85% in November and December, and while usage is below its all-time high of 87%, the stock-to-sales ratio is over 10% at pre-pandemic levels and there is no “ghost space” for stock resizing.
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These “just in case” trends add to the pre-existing “need for speed” trends that continue to be dictated primarily through e-commerce giant Amazon and increasingly Walmart (WMT), Target (TGT), Home Depot (HD) and Lowe’s. (BAS). The pandemic has especially accelerated the penetration rate of e-commerce, which requires up to 3 times more logistics surface than classic sales. A potential double-edged sword for commercial REITs, the very scarcity of retail space has led to investments in logistics technologies that may eventually lead to higher levels of space efficiency, higher usage rates, and in all likelihood, reduce the need for physical space.
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Valued more for their dividend expansion than for their existing returns, industrial REITs pay an average dividend yield of 2. 7%, which is lower than the average REIT of about 3. 2%. However, it is noteworthy that commercial REITs have higher dividend distributions MFF increased by almost 10% in line with the year since 2014, which is particularly consistent with the industry average REIT of around 4%. Industrial REITs pay about 60% of their loose money flow, leaving a giant cushion for expansion fueled by executing dividend increases.
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Within the sector, we realize the various methods of the 13 trading REITs where the “trade-off” between the existing yield of h8 and the expansion of long-term dividends becomes apparent. The 4 “yield REITs” in the most sensitive part of the chart pay an average return between 3. 5% and 9. 4%, but they have noticed that their dividends accumulate at slower rates. By contrast, the remaining 8 growth REITs pay an average dividend yield of around 2. 3%, but have noticed that their dividends accrue at an average of 10%. consistent with the year over the past five years.
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Industrial REITs, a perennial functionality leader in recent years, have come under fire in the past month with 20-30% drops after Amazon announced plans to cut prices on its fulfillment network. Amazon, the largest commercial REIT tenant, still accounts for only 3-5% of the total space occupied. These overcapacity issues appear to be company-specific, as broader commercial vacuum rates remain at record levels. Amazon’s bitter report followed a stellar list of commercial REIT earnings reports, highlighted by incredible hiring expansion of more than 30% on average, and overshadowed several primary M&A developments. We had reduced our exposure to commercial REITs prior to this sale given the higher valuations previously, however, the recent carnage is an opportunity to double the bet on several dividend champions. Our premium valuations are justified given the secular tailwinds from limited sources and physically powerful demands that are likely to persist into the current part of this decade.
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