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Why You Shouldn’t Lump All Industrial REITs Together

Another day, another misguided attack on real estate investment trusts (REITs).

I’ve been following the REIT space for 25 years. Most people see REITs as an indicator of real estate trends… and where the economy is headed overall.

Since REITs began selling off in 2022, the real estate sector has served as a bit of a punching bag for short sellers. 

The most recent short attack in the REIT space was targeting Rexford Industrial Realty (REXR). 

Industrial REITs own, manage, and rent out space in facilities like warehouses and distribution centers. They’re key to fulfilling online orders and the e-commerce phenomenon. 

And when one company in a specific sector sees a short attack, the whole sector takes a hit. 

The industrial REIT sector is down an average -2% after this short attack news.

Today, I want to show you why people are shorting this stock and what’s really happening with industrial REITs. Then, I’ll tell you about one of my favorites that the market is punishing unfairly.

This is a great opportunity to take advantage of someone else’s mistake… and help boost our own income stream.

Why We’re Still Bullish on Industrial REITs

At first glance, when it comes to shorting real estate stocks, I get it. 

Short sellers are betting against certain REITs because of high interest rates. 

But this comes from a short-term mindset that is likely to fail. 

Real estate stocks probably seem like easy targets because of rising rates. 

And over time REITs have drawn investors in with their high dividends. 

But lately, these yields look relatively less attractive when short-term Treasury notes provide 5% yields. 

And investors who focus on this recent dynamic are missing the big picture. 

The Fed is raising rates so aggressively because inflation is high. But that isn’t a bad thing for REITs. 

Hard assets, like real estate, tend to perform best during periods of stagflation (an extended period of time when high inflation persists).

When the cost of the raw materials and labor required to build new buildings rises, the value of existing structures increases as well. 

That’s especially the case when we’re talking about prime real estate near bustling ports. 

One thing you can never create more of is land. Its finite supply means that landlords benefit from rising demand.

So not only does inflation drive up the value of REIT holdings, but it also allows management teams to raise rents. 

For example, Rexford has been growing its rents by double digits in recent years. In 2022, it raised rents by 52.4%.

Results like this show how strong demand is for industrial properties.

These rising rents result in bottom-line growth, which supports higher share prices over time.

You see, long-term trends in e-commerce are only going to lead to more growth.

Companies like Amazon and Wal-Mart have had to build out massive networks for distribution and fulfillment to meet their e-commerce demand.

In many cases, it’s easier for them to rent out warehouse space than to develop these capital-intensive projects on their own. 

And now, this trend is speeding up thanks to technology.

Automation is progressing, and companies are partnering with the best industrial landlords to make sure they keep up with their peers. 

Forbes expects e-commerce to grow from $5.2 trillion in sales in 2021 to $8.1 trillion in 2026. And while 20.8% of retail purchases are made online today, that should increase to 24% in just three years.

Industrial REITs have benefitted from retailers’ decades-long shift from physical to digital sales.

For instance, Rexford has produced double-digit adjusted funds from operations (AFFO, the profit-related metric we use to evaluate REITs) in 7 of the last 9 years. 

And looking at consensus analyst estimates, this trend is expected to continue. 

According to Allied Market Research, the warehouse and distribution logistics market is expected to grow from $12.1 billion in 2021 to $25.8 billion by 2031.

That’s a compound annual growth rate of 7.7%.

So demand for e-commerce and the industrial REITs that deliver on them isn’t going anywhere.

A Better Opportunity Than A REIT Under Attack

So with growth like that, why would someone bother shorting an industrial REIT like Rexford?

Simple… Because of the one market its management team has focused its attention on: Southern California.

Rexford was in a great position to take advantage of the Port of Los Angeles – the busiest port in the western hemisphere.

As the dominant industrial landlord in the area, it got the bulk of goods pouring into the U.S. from Asian markets.

But the recent short attack says demand in these areas has peaked. And they believe Rexford’s growth prospects are slim. 

Fear surrounding real estate – empty office buildings, overpriced homes, and a declining population – also doesn’t help sentiment in that market.

As great as Rexford’s historical performance has been, its lack of geographic diversity has always been a risk. Which is why we stay away from REITs that focus on one region alone.

That being said, I don’t believe these bearish points apply to the rest of the industry overall. 

Looking at development activity in much of the rest of the country – and even abroad – I see that strong demand trends are still in place. 

This includes e-commerce growth, AI, automation, and other tech advances.

These will all help warehouses increase efficiency, resulting in higher rents for landlords who adopt them.

And there’s one industrial REIT I believe has an edge over others in the space.

Like Rexford, it has also seen double-digit growth in 7 of the last 10 years. But unlike Rexford, it owns properties across the globe…

When it comes to the world’s largest shipping hubs… You name a port city, and it probably owns land and warehouses nearby. 

Best of all, it’s on a 10-year dividend increase streak.

In recent weeks, it’s been caught up in negative sentiment and has sold off slightly. But that’s giving us our opportunity today. 

You see, Amazon accounts for 37.8% of e-commerce sales. That’s the highest of any retailer. And this industrial REIT counts Amazon among its biggest tenants.

That’s why I just put together a special presentation called “Amazon’s Secret Royalty Program.” It shows you how you can set up an income stream from this REIT and another of my favorite plays.

But this opportunity could be short-lived. So you should act now to learn how to take advantage of this market overreaction and set up your own “royalty” payment program today.

Happy SWAN Investing,

Brad Thomas
Editor, Intelligent Income Daily