Plymouth Industrial (NYSE:FEATHER), founded in 2011 and headquartered in Boston, Massachusetts, is a REIT that acquires, develops and manages single-tenant and multi-tenant industrial properties, such as warehouses and distribution centers.
I believe that at current levels, PLYM is attractive, despite the low dividend yield. So it may be a good addition to a value-oriented portfolio, but a bad addition to a dividend-oriented portfolio. Leverage is also not that high, liquidity seems to be improving, and operating results have seen strong growth. But let’s start from the beginning.
As of September 30, 2023, the Company’s properties consisted of 156 industrial properties, which in turn consisted of 211 buildings totaling approximately 34.1 million square feet. The portfolio is spread across 13 states, in areas with broad access to a skilled workforce.
More specifically, the properties are located in what the company calls the Golden Triangle because it includes more than 70% of the U.S. population, more ports than any other region in the United States, and is responsible for more than half of U.S. GDP, among other things key features.
As of the end of 2022, here is the geographic concentration for each state in which buildings are located based on the ABR:
It’s obvious that without these two images above, one can overestimate how diversified the portfolio is based on the number of states alone. Plymouth derives much of its revenue from Chicago and most from Chicago, Memphis, Indianapolis, and Cleveland.
However, I should also mention that the portfolio is well diversified based on property type since 57.5% of the ABR is generated by distribution warehouses, 26.1% by light manufacturing warehouses and 16. 4% by Small Bay industrial properties.
Additionally, there is sufficient diversification regarding the sectors served by the REIT, without relying too much on logistics and transportation:
Finally, only 15.9% of AGR was generated by the ten largest tenants in 2022, with FedEx Supply Chain, Inc. being the largest contributor (2.4% of AGR).
When it comes to its long-term historical operating performance, Plymouth presents an attractive growth story, as you can see below:
With revenues hitting new highs every year and operating profit constantly growing, here we have a relatively young REIT with a confident upward trend. Only FFO is lagging behind, but that’s normal because it’s still too early.
As for the occupancy rate, the rate stood at 97.6% as of September 30, which signifies efficient portfolio management and room to increase profitability if more space is rented.
Today, recent results show growth even greater than long-term trends. Below I have compared the most recent annualized quarterly figures with the average annual figures for the last 3 financial years:
|Growth in rental income
|Cash NOI Growth for Comparable Properties
|Growth of AFFO
Unsurprisingly, the market appreciated such growth, as shown by the tripling of PLYM’s price after the 2020 withdrawal and before the start of Fed rate hikes in 2022:
When it comes to the use of leverage, Plymouth finances 60.31% of its assets with line of credit, secured and unsecured debt. Its interest coverage of 0.96x may be low, but it appears the REIT has been improving it for some time and its debt-to-EBITDA ratio of 7x represents ample liquidity.
As of September 30, the weighted average interest rate on its secured debt was 3.86%, 3.58% for its unsecured debt and 6.98% for its line of credit. Additionally, the upcoming maturity next year poses no serious threat to Plymouth’s overall debt cost, as it represents only a very small portion of the total long-term debt of approximately $890 million. . The amount due in 2025 linked to the revolver is significantly higher, as is its interest rate; the REIT is unlikely to refinance at a much higher rate.
Dividend and valuation
Plymouth Industrial currently pays a quarterly dividend of $0.23 per share, implying a forward yield of 3.79%. Even if the yield were higher, I think PLYM would still not be considered a good addition to an income portfolio. The payout ratio is very low at 55.28% based on AFFO, but the payment history does not inspire confidence regarding dividend growth prospects:
That aside, PLYM is currently very attractive as it trades at an implied cap rate of 5.75%. With capitalization rate for industrial real estate forecast at an average of about 5%, I think assuming the average for PLYM is unfair but conservative. Nonetheless, this conservative assumption suggests an 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, around $30 is familiar territory for PLYM, as it was trading at this level before the Fed started raising the rate:
This, combined with excluding the usual suspects like lack of growth, high debt, and large short-term maturities, leads me to believe that non-fundamental factors are responsible for the current undervaluation. Perhaps now that the Fed is likely to start cutting rates in 2024, the stock price will be able to accurately represent NAV again.
However, certain risks exist. First, the lack of a high dividend yield suggests that your annual dividend yield might not be enough to offset an opportunity cost. It also doesn’t help that payments seem to be increasing at a very slow rate.
Additionally, long-term holders will need to factor in much higher maturities over the next few years. Although interest rates will likely have been lowered by then, this is still speculation.
A less significant but still worth mentioning risk relates to the geographic concentration of Plymouth Industrial’s portfolio. Other REITs that own assets across the country are able to better hedge risks related to changes in unemployment rates, population, and supply/demand dynamics that differ from state to state.
Finally, keep in mind that calculating NAV is not an exact science and 5% may prove unrealistic in the future. In such a case, your margin of safety may shrink and expose you to the terrible volatility of a fairly or even overvalued security.
Regardless of these risks, I believe a repricing to ~$30 is imminent and well deserved, a duo that motivates me to rate PLYM as a buy at current levels.
Of course, the dividend yield is nothing to write home about and if you’re looking for a choice for your dividend portfolio, PLYM would be inappropriate given the number of quality, fairly priced dividend growing REITs you can find from our days. But PLYM is a pretty good option for a value portfolio.
What do you think ? Do you own PLYM or plan to do so? Why or why not? Be sure to let me know below and I will get back to you as soon as possible. Thanks for the reading.