- Did you know you can own a warehouse
leased to Amazon?
Amazon, like many other large companies,
often lease properties instead of owning them.
And if you don't want to invest the tens
or hundreds of millions of dollars
it would take to buy the physical warehouses,
you can own shares in publicly traded companies
which does this on your behalf.
This video is an introduction
to Industrial Real Estate Investment Trust.
And with the E-commerce explosion bringing a considerable
amount of attention to these massive warehouses,
there's an increased investor appetite
for these types of investments.
I'm gonna break this video down to the following topics,
timestamps are in the description,
if you wanna jump to any section in particular as well.
So what is a REIT?
REITs enacted into legislation in 1960
giving everyday investors the ability to participate
in institutional grade investment properties,
either on the property side or on the mortgage side.
Before REITs came along,
investing in these large commercial properties
was simply unobtainable for the average investor.
There are private REITs and public non-listed REITs,
but the most popular ones are listed on major exchanges.
And to that extent, an investor can purchase shares
and these REITs the same way they could purchase shares
in other publicly traded companies.
The best way I've heard this described,
is that you're buying into a
fractional ownership of a company.
In the case of REITs,
this means you're indirectly getting ownership
of their entire portfolio of properties.
And investors have flocked to REITs in astonishing numbers,
driving the aggregate market caps of US rates
over a trillion dollars.
As the REIT industry has grown,
many of them realized they could be more efficient
by focusing on one asset class.
You will still find diversified REITs that own properties
in multiple asset classes, but it's increasingly
becoming more common to see pure play REITs
which focused on one type of property
such as office, retail, industrial, hospitality, lodging,
self storage, or even data centers.
Industrial real estate is the focus of my channel,
so if you've watched any of my other videos,
this next section will be an overview
of what I've talked about extensively.
Industrial real estate is a broad term,
so the first thing I recommend is breaking it down
into the following sub categories,
warehousing, manufacturing, and flex properties.
Warehousing properties are the large distribution centers
designed to store goods or materials.
It also includes warehouses which store products
for months or even years,
as well as properties that might only hold product
for days or perhaps even hours.
These properties have been increasing in demand lately,
driving vacancy rate to record low levels
in some hot markets.
The other type is manufacturing properties,
and these are buildings designed for the manufacturing,
assembly, or production of raw, semi-raw, finished goods.
These can be elaborate operations,
such as the Boeing factory,
or small, simple buildings that manufacturer consumer goods.
There's surely a small operation out there
which makes Boeing model planes for kids and some adults.
The other main category is flex,
which is sort of a catch-all term
to include all the industrial properties that aren't
specifically designed for warehousing or manufacturing.
This could include lab space, bottle depots,
showroom space, and dozens of other examples, really.
Check out this video up here,
if you wanna dive into the topic deeper,
you can already see why this is important,
if you want to invest in an industrial REIT, it's prudent to
know what segment of the industrial market they cater to.
It's a simple fact that E-commerce is not likely compatible
inside of manufacturing property and vice versa.
You'll see, as we get into the REITs, most of them clearly
identify what type of property they focus on.
(music upbeat piano)
My first point might not be overly relevant to you
if you're only planning on investing in a REIT.
But if you already own physical industrial real estate
or planning to in the future, this next point is important.
One trait that I've noticed in all successful industrial
real estate investors,
is they all have their fingers on the pulse of the market.
That's why I like to think a huge benefit of owning a REIT,
is you get access to a ton of valuable market information.
In addition to putting out quarterly earnings reports
and conference calls, these companies often provide helpful
insights into their investment strategies
and where they see opportunities.
In other words, owning a handful of REITs
is a fast track way to gain market intelligence.
Now, to be fair, you could follow along without owning
anything, but I believe it's human nature to be more
engaged if you have some skin in the game.
And the beautiful part is that there aren't any
financial barriers to get started.
You could buy $100 worth of stock or $1 million,
and you have near instant liquidity
if you decide you wanna sell.
Invest in a REIT also means you don't have to
actively manage any of the properties,
REIT does this on behalf of all investors,
and to be a REIT in the first place, companies have to pay
out 90% of their taxable income.
Provided there Isn't some shock to the system,
like some office and retail REITs experiences past year,
investors can earn regular dividends and share
in any appreciation of the stock price.
And since the movement of a stock price is a derivative
of the underlying performance of a company,
as a shareholder, you can participate in the underlying
value of the property is going up,
but you also share the risk of it potentially going down.
And that leads to the drawbacks of owning a REIT.
There's a nearly exhaustive list that we could explore.
But I'm only gonna focus on the main ones,
from my perspective.
First, you can't use leverage the same way you could invest
in physical real estate.
You could use margin, but it's a much riskier endeavor
in the stock market versus the real estate market.
Physical real estate can also offer considerable tax
benefits that come from depreciation or 1031 tax exchanges,
and you lose those as a REIT investor.
If you've followed REITs extensively over the past year,
you'll also know that some non-industrial REITs temporarily
suspended dividends altogether.
Naturally there are an unlimited potential risks
to the market, the economy, and even each respective REIT.
If you want more dangerous signs to watch out for,
check out this video from Nick.
(music upbeat piano)
It would be Virtually impossible to try analyzing property
level details for REITs that can own dozens, hundreds
or thousands of properties, most REITs will break
down what type of property they own.
So the first step I take is to determine whether their focus
is on warehousing, manufacturing, or a combination of both.
For example, PROLOGIS, the largest industrial REIT in the US
owns primarily warehouses
designed for distribution logistics.
Most REITs will also share high level property information,
such as where the properties are located,
and when leases are coming up for renewal.
you can appreciate that having a high percentage of leases
coming up in one year, versus 10 years
can create challenges or opportunities.
It's a challenge if the market is softening,
it's an opportunity if the market is strengthening.
Moving on to the financial metrics,
you'll need to be aware that REITs track
their performance differently than C corporations.
While all publicly traded companies have strict requirements
when reporting, the REIT industry introduced new
measurements back in the nineties
which has since been recognized by the SCC to include
in their supplementary earnings reports.
If you look up any REIT,
you'll see the metrics you're already familiar with.
But instead of focusing on earnings, the REIT industry
uses a term known as Funds From Operation or FFO.
The biggest difference between earnings
and FFO is how depreciation is accounted for.
Under traditional corporation,
an asset is depreciated over its useful life.
REITs conversely, have successfully argued
that real estate often does not depreciate,
and therefore should not be factored
into these earnings calculations.
NAREIT, the industry association for REITs,
has a white paper on FFO and it looks quite daunting.
What makes it even more confusing,
many different REITs have come up
with their own unique way of calculating FFO.
So you might hear the term normalized FFO,
Core FFO, Operating FFO.
And some companies don't even disclose these calculations.
If you're feeling confused, let's break this down
to make it really simple.
Net Income, add back in the depreciation,
subtract gains or losses from real estate sales,
add or subtract adjustments for partnerships
and joint ventures, and that will equal your FFO.
The biggest adjustment is likely gonna be depreciation
unless of course a REIT was heavily active
in acquisitions or dispositions.
If we take FFO, we can make a few more adjustments
to make an equally important number called
adjusted funds from operations, or AFFO.
There's no standardized definition of AFFO,
and REITs might do it all a little bit differently,
but here's an example of what the calculation
could look like.
FFO subtract tenant improvements,
subtract straight line rents,
which is an average rental rate over the terminal lease,
subtract leasing commissions and building improvements,
and that will give you the adjusted funds from operations
or AFFO.
AFFO is a measure of the company's ability to pay
obligations and dividends.
So you might also hear referred to as the cash available
for distributions or funds available for distributions.
So let's summarize this,
FFO is a measure of earnings
and AFFO is a measure of cashflow.
This is important, because instead of tracking
earnings growth, the REIT industry tracks
FFO growth and AFFO growth.
A closely related measure to track growth is borrowed
from the retail industry called Same Store.
Just like a retailer tracks how much each individual
store gains or loses, a REIT tracks growth or declines
in individual properties.
Naturally, I'm just scratching the surface here.
So if you're looking to invest in REITs
and wanna study it further,
there's an excellent standalone course put on by NYU
or for a cheaper option, this is a great book too.
I'll put links in the description for both.
We've already covered a lot of material here,
so before I go into the outlook,
I have to emphasize that I'm not an investment advisor.
So do your own due diligence
before making any investment decisions.
And if you're getting any value from this video,
please smash that like button.
And if you don't like this stuff,
crushed that dislike button,
I'll know I need to change things up.
But back to the old look,
I think it's important to delineate
the industrial real estate market from the stock market.
On the real estate side,
I believe industrial will outperform the other asset classes
for the foreseeable future.
E-commerce is gonna continue growing
and companies will increasingly require more warehouse space
to accommodate it all.
And there's plenty in the news about how little supplies
available, and how demand is heating up.
So I'm very bullish on the longterm prospects of physical
industrial real estate.
I also subscribed to the notion that a reprice will rise
over time in accordance with improvements in cashflow.
So I plan on holding the REITs I have,
which right now is Prologis, Duke Realty,
and Stag Industrial, at least for the foreseeable future.
It's worth highlighting though that all three of these
are at or near all time highs.
So the market is clearly pricing
in some aggressive growth expectations as well.
That's why I think it's necessary to separate
the longterm real estate market,
from the short-term stock market.
Conceivably, there are an infinite amount of factors
that could cause the market to falter.
So in the short run, there could still be a lot
of volatility and stock prices could move independently
of the underlying value of the real estate itself.
In the long run, we also have to worry about overbuilding
and the accompanying set of issues
that would come with that.
Whether it's a short or long run,
the industrial real estate market
is gonna be fascinating to watch.
And that's what my channel is exclusively about.
So if you wanna come along for the ride,
please consider subscribing.
Thanks for watching, catch you in the next video.
(beeping)
(music upbeat piano)
Substract.
Why am I saying "substract"?
Did you know you can own it in a ...
(hesitating music)
(air swooshing)