With the strong, steady demand for industrial real estate, Plymouth Industrial (PLYM, Financial) has expanded its portfolio of properties and benefited from increased rental rates. The real estate investment trust owns various industrial properties, from warehouses and distribution centers to light industrial and small bay industrial sites.
What sets Plymouth Industrial apart is its commitment to ensuring reliable long-term tenancy; it typically leases these properties to single tenants under NNN leases, thereby enabling it to maximize its revenue with updated rentals each time an existing lease expires.
Recently, the REIT has invested in secondary markets, which is a smart move as industrial demand continues to rise across the U.S. Moreover, the company's current excellent occupancy rate of 99% at its properties bodes well for the bottom line, with dividends already yielding good financial returns as REITs must pay out 90% of their taxable income to shareholders.
Though the stock suffered a sharp fall of 30% last year, short-term hiccups shouldn't deter investors from seeing the long-term potential of a company.
Plymouth's focus on smaller regions is an advantage
Plymouth Industrial is heavily invested in Tier II markets, which I believe is the best strategy for the REIT. Tier II markets are relatively smaller cities than the likes of New York or San Francisco, but they are still big enough to have a solid industrial and logistical base. A lot of business activity occurs in these regions for several reasons. The higher cost of living in the larger cities means labor is more expensive, and higher poverty rates among low-wage workers means they are more likely to try and unionize. Focusing on Tier II, Plymouth can also acquire real estate at lesser costs than the Tier I markets.
Apart from focusing on the Tier II markets, Plymouth also caters to their specific needs. Instead of offering mid to large industrial warehouses in the range of 150,000 square feet to 500,000 square feet, the company focuses on warehouses in the range of 20,000 square feet to 250,000 square feet. The smaller warehouses cater more effectively to the needs of these Tier II markets and are easier to lease.
Steady returns over many years
While the company is investing heavily in the Tier II markets nowadays, it also has a strong presence in Tier I markets in the northeast, southeast and midwest, the major population and business centers of the U.S. These markets enjoy a steady stream of available real estate, leading to lower returns in terms of increase in rental income. Plymouth has reported more than 15% growth in industrial rents in some major cities over the year.
Even if the rental income growth is not spiking, the business remains steady, and leasing out any available real estate is easy due to the high demand. In these difficult economic times, businesses need to be able to rely on a constant income stream, which Plymouth's Tier I markets provides.
The economic slowdown could negatively impact the markets
Economic slowdowns are never good for any business, and the real estate sector usually takes a big hit. As businesses go down, this leads to empty rental spaces and losses for REITs. A decline in occupancy rates eats into profits and can lead to losses.
However, the recent numbers from Plymouth are encouraging. Plymouth Industrial is currently posting net losses, but its long-term prospects are excellent. The company expects a strong 2023 driven by its leasing business. The company's CEO, Jeff Witherell, said the company saw an 18.5% increase in rental rates on a cash basis. He also added that in 2022, a 160 basis points increase was seen in occupancy.
Plymouth's strong performance is a sign that the real estate market is still robust, despite challenges in some sectors. Plymouth's 99% occupancy rate is a vote of confidence from the market and indicates that the company is weathering the effects of the economic slowdown well. The company's diversified portfolio is undoubtedly helping, and a decline in particular industries is unlikely to lead to lower occupancy rates for the REIT.
Takeaway
REITs can be a great way to earn dividends and weather market turbulence, as these companies are required to pay out at least 90% of their taxable income to shareholders. Plymouth currently offers a dividend yield of 4.21%, which should tide investors over even in a recession. Even though it is not doing well on an earnings per share basis, it is still positive on the funds from operation front with a price-to-FFO ratio of 12.81. One thing to watch out for is any further dividend cuts, though. The company has a three-year dividend growth rate of -17.9% due to dividend reductions. The income from REITs is never guaranteed if the business tanks. Plymouth had to slash its dividend due to the Covid-19 pandemic, consistent with the decline in income.
