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.
Related: This Real Estate ETF Is A Strong Retail Idea
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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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.