News out Monday that real estate investment trust (REIT) Prologis (NYSE: PLD) will acquire rival Liberty Property Trust (NYSE: LPT) for $12.6 billion ignited a rally in the already high-flying Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEArca: INDS).
INDS offers investors exposure to US companies that generate the majority of their revenue from industrial REITs that are part of the e-commerce distribution and logistics network. INDS provides exposure to the growing e-commerce space by investing in data center and distribution center REITs, along with higher quality retail real estate.
On the back of the Prologis/Liberty Property deal, INDS hit another record high and is up almost 38% year-to-date, a performance that crushes the returns offered by traditional REIT ETFs.
INDS is a play on e-commerce and the related real estate demands. Currently, e-commerce and online shopping represent about 10% of overall U.S. retail sales, a number that is expected to continue growing in the years ahead. The sudden rise of online giant retailers like Amazon has increased demand for warehouses to store inventory. Around 25% to 30% of warehouse space is currently dedicated to e-commerce.
Leverage To The Deal
Putting INDS’ Monday rally into context is easy. The fund allocates a combined 26.57% of its weight to Prologis and Liberty Property. Those stocks are the ETF’s largest and third-largest holdings, respectively.
“BTIG estimates that the price Prologis is paying implies a capitalization rate—a measure of the yield of a property investment—of 4.6% for Liberty, after adjusting for Noncore office properties it owns. That is slightly higher than the 4.4% cap rate Prologis paid for DCT Industrial Trust in April 2018,” reports John Coumarianos for Barron’s.
While INDS focuses on a growth segment of the real estate space, the ETF still offers a solid income proposition. The fund has a dividend yield of 3,17% and the potential for significant dividend growth. Dividends paid by industrial REITs surged 70% from 2013 through 2018, according to Nareit data.
“With the Liberty purchase, Prologis would acquire properties in Southern California, Houston, the Chicago/Milwaukee area, and the Lehigh Valley in Pennsylvania, which is relatively close to New York City, Philadelphia, and Washington, D.C.,” according to Barron’s.
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