2023-12-23 03:51:00 ET
Summary
- Pacer Benchmark Industrial Real Estate SCTR ETF invests in industrial REITs, which have seen strong growth due to e-commerce demand.
- People have been avoiding commercial REITs, but not all are same. There are high quality commercial REITs in sectors other than office buildings.
- Industrial REITs include various types of real estate assets such as warehouses, fulfillment centers, and logistics infrastructure in strategically valuable locations.
- The fund's top holdings have a history of dividend growth and are well-positioned for future opportunities in renewable energy and e-commerce.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS) is a sector specific fund that invests into commercial REITs, more specifically industrial REITs.
In the last few years commercial REITs and industrial REITs got a bad name and investors sold them off because they associated these types of REITs with office buildings and it made sense to them because demand for offices have been dropping for the last few years driven by rising work-from-home trends but many people don't realize that commercial REIT world is much more than just office buildings and it includes many different types of real estate assets.
Commercial REITs could include different types of real estate assets including but not limited to storage facilities, warehouses, factories, data centers, distribution centers, fulfillment centers and logistics infrastructure so it's much more than just office buildings.
In recent years we actually saw industrial REITs post strong growth rates driven by e-commerce. As many retailers started to follow Amazon's ( AMZN ) model, this created a huge need for distribution centers and fulfillment centers which there weren't enough of because no one expected e-commerce demand to rise this quickly which created a supply and demand imbalance in favor of these REITs. Many of them started to build new infrastructure to support this new demand and it will be years before the demand is completely addressed which is still rising as we speak.
Building new industrial facility is not as easy as just buying empty land and putting a building on it either. These days logistics are extremely complicated and you need to build facilities that are close to distribution hubs such as airports and seaports as well as close proximity to major highways and supply chains. Putting your manufacturing plants and distribution centers in strategic locations is becoming increasingly important which means there is limited amount of premium land that everyone is competing for. You also have to factor in demographical factors because if you put a factory or logistics center in a place without many people to employ, it will hurt your chances of success. Commercial land near places with strong population growth will sell at a premium because you will be closer to having access to both a bigger employee pool as well as more customers.
This is why many companies rely on industrial REITs instead of trying to deal with it themselves since not all companies have the massive resources of Amazon which can build an infrastructure of its own wherever it wants to. Smaller companies and most e-commerce companies will rent from REITs instead of trying to find land, buy it and build on it. This is why commercial REITs are very important and good quality ones with good locations will see a lot of demand for decades to come.
INDS holds less than 40 stocks which is not that many and top 10 stocks account for about two thirds of its total weight. Notice that the fund's top 2 holdings are Prologis ( PLD ) and Public Storage ( PSA ) two of which account for about 30% of its total weight. Prologis is more of a logistics company that serves many different industries from energy to data center. It owns or operates a portfolio of 1.2 billion square feet of assets in 19 different countries. If you had to buy one company in this sector, this could be it.
Top 10 Holdings (Seeking Alpha)
The fund has a dividend yield close to 4% and it's been paying quarterly dividends since its inception. Interestingly enough the fund also has a history of dividend growth spanning several years but this shouldn't be too surprising considering that most of its large holdings have a history of dividend growth.
Below are some of the fund's top holdings that have a history of hiking their dividends and we see that many of them hiked their dividends anywhere from 50% to 105% in the last 5 years. I could see this trend continuing in the coming years as long as we don't get a severe recession.
In the future I could see several avenues of opportunities for industrial REITs. First, we are seeing a lot of growth in renewable energy which includes an infrastructure for not only generating energy but also transporting and storing it. Prologis is one of the major players working in this sector with its energy partners to ensure that we have the correct infrastructure in place to generate and transport renewable energy. Another opportunity is the rise of e-commerce and more need for fulfillment centers and different types of warehouses. Industrial REITs with a data center component will also benefit from rise of cloud and AI solutions but it appears that not many of this fund's holdings necessarily fall into this category.
One thing I don't like about this fund is its high expense ratio of 0.6% especially considering that it has a small number of stocks, it's not doing anything complicated like options plays or hedging and its top holdings account for most of its weight which means investors can easily replicate the fund's returns by buying its top 5-10 holdings but this fund could still create ease for those investors who want to take a passive approach and don't mind paying the fee for ease of mind. For some of you, 0.60% might not sound like a lot but think of it like this: if you didn't have to pay this fee, your effective dividend yield would rise from 4.0% to 4.6% which is a significant difference.
All in all, investors should ignore the noise that says that commercial REITs are on decline when it's only certain types of commercial REITs that are experiencing this such as office REITs. There are still different types of commercial REITs that are doing well and will continue to do well if the current trends continue so investors shouldn't dismiss all commercial REITs as one. Even if they don't buy this fund, investors can still benefit from holding at least one or two high quality industrial REITs with a history of earnings growth and dividend growth.
The biggest risk factor for this sector is debt. It costs a lot of money to build industrial infrastructure and many of these companies have high levels of debt. As interest rates rose in recent years, it probably became more difficult for these companies to access cheap debt and many of them are also using other methods such as preferred stocks to raise capital. Most of these companies will be fine but if you are picking your individual industrial REITs, their debt levels and debt structure is something you should pay attention to. This is true for all REITs regardless of sub-sector though.
For further details see:
INDS: Certainly Worth A Look