2023-12-30 05:15:20 ET
Summary
- Plymouth Industrial is a REIT that leases industrial real estate like warehouses and distribution centers.
- Income-oriented investors may want to look elsewhere because the dividend yield is low and the payout unlikely to grow at a good pace.
- However, value investors should consider the significant discount to NAV, reasonable use of leverage, and very high growth of the business over the years.
Plymouth Industrial ( PLYM ), founded in 2011 and headquartered in Boston, MA, is a REIT that acquires, develops, and manages single and multi-tenant industrial properties, such as warehouses and distribution centers.
I believe that at current levels, PLYM is attractive, notwithstanding the low dividend yield. So, it may be a good addition to a value-oriented portfolio, but a bad one for a dividend-focused one. Leverage is also not that high, liquidity seems to be improving, and operating results have experienced a lot of growth. But let's take things from the start.
Portfolio
As of September 30, 2023, the company's properties consisted of 156 industrial properties that in turn were comprised of 211 buildings that aggregated about 34.1 million sqft. The portfolio is located in 13 states, positioned in areas with large access to skilled labor.
Specifically, the properties are located in what the company calls the Gold Triangle, as it includes over 70% of the U.S. population, more ports than any other region in the U.S., and is responsible for more than half the U.S. GDP, among other key traits.
As of the end of 2022, this is the geographic concentration for each state the buildings are located in based on ABR:
It is evident that without these two images above, one can overstate how diversified the portfolio is based on the number of states alone. Plymouth derives a large chunk of its revenue from Chicago and most of it from Chicago, Memphis, Indianapolis, and Cleveland.
However, I need to also mention that the portfolio is well-diversified based on the property type as 57.5% of ABR is generated through Distribution warehouses, 26.1% from Light Manufacturing warehouses, and 16.4% from Small Bay industrial properties.
Additionally, there is sufficient diversification when it comes to industries the REIT serves, without relying too heavily on Logistics and Transportation:
Last, only 15.9% of ABR was generated by the ten largest tenants in 2022, with FedEx Supply Chain, Inc. being the biggest contributor (2.4% of ABR).
Performance
When it comes to its long-term historical operating performance, Plymouth presents an attractive growth story, as you can see below:
With revenue making new highs every year and operating income moving along, what we have here is a relatively young REIT with a confident upward trend. Only FFO lags, but that is to be expected as it's still too early.
As for the occupancy, the rate stood at 97.6% by September 30, signifying efficient management of the portfolio and a margin for increasing profitability if more space is leased.
Now, recent results depict even greater growth than the long-term trends. Below, I compared the most recent quarterly figures annualized with the average annual ones of the last 3 fiscal years:
Rental Revenue Growth | 37.66% |
Same-Property Cash NOI Growth | 57.65% |
AFFO Growth | 61.72% |
Not surprisingly, the market has appreciated such growth, as is evident from the price of PLYM tripling after the drawdown in 2020 and before the Fed rate hikes started in 2022:
Leverage
When it comes to its use of leverage, Plymouth finances 60.31% of its assets with a line of credit, secured, and unsecured debt. Its interest coverage of 0.96x might be low, but it seems that the REIT has been improving it for quite some time and its debt-to-EBITDA of 7x depicts enough liquidity.
As of September 30, the weighted average interest rate for its secured debt was 3.86%, 3.58% for its unsecured debt, and 6.98% for its line of credit. Moreover, the upcoming maturity next year presents no serious threat to Plymouth's overall cost of debt because it's only a very small portion of the total long-term debt of ~$890 million. The amount coming due in 2025 related to the revolver is significantly higher, but so is its interest rate; it's unlikely the REIT is going to refinance at a much higher one.
Dividend & Valuation
Plymouth Industrial currently pays a quarterly dividend of $0.23 per share, which implies a 3.79% forward yield. Even if the yield were higher, I believe PLYM would still not qualify as a good addition to an income portfolio. The payout ratio is very low at 55.28% based on AFFO, but the payment record doesn't inspire confidence when it comes to the prospect of dividend growth:
Putting that aside, PLYM is quite attractive right now because it's trading at a 5.75% implied cap rate. With cap rates for industrial real estate forecast to average around 5%, I believe that assuming the average for PLYM is unfair but conservative. Still, this conservative assumption suggests NAV at $30.78, which in turn reflects a 21.15% discount to NAV and a 26.82% upside from current levels.
And for what it's worth, ~$30 is familiar territory for PLYM as it was trading that high before the Fed started increasing the rate:
This, in conjunction with the exclusion of usual suspects like lack of growth, high leverage, and large near-term maturities, makes me suspect that non-fundamental drivers are responsible for the current undervaluation. Maybe now that the Fed is likely to start cutting rates in 2024 the stock price can get back to accurately depict NAV.
Risks
Still, some risks are present. First, the absence of a high dividend yield suggests that your annual return from the dividends may not be enough to offset an opportunity cost. It's not helpful that the payout seems to be increasing at a very slow pace, either.
Also, long-term holders will have to take note of the much higher maturities in the next couple of years. Although the interest rates are likely to have been lowered by then, that's still speculation.
A less important but still worthy of mention risk is related to the geographical concentration of Plymouth Industrial's portfolio. Other REITs that have assets all over the country are able to better hedge risks that come from changes in unemployment rates, population, and supply/demand dynamics that differ from state to state.
Last, keep in mind that calculating NAV is not an exact science and 5% may turn out to be unrealistic in the future. In such a case, your margin of safety can narrow and leave you exposed to the dreadful volatility of a fairly or even over-valued stock.
Verdict
Regardless of these risks, I think that a repricing at ~$30 is imminent and well deserved, a duet that motivates me to rate PLYM a buy at current levels.
Sure, the dividend yield is nothing to drool over and if you're looking for a pick for your dividend portfolio, PLYM would be inappropriate considering how many quality dividend-growing REITs at fair prices you can find these days. But PLYM is a fairly good option for a value portfolio.
What's your take? Do you own PLYM or intend to? Why or why not? Make sure to let me know below, and I'll get back to you as soon as possible. Thank you for reading.
For further details see:
Plymouth Industrial: High Growth At A Low Price