WPT Industrial: Benefiting From Continued Growth In E-Commerce (OTCMKTS:WPTIF)

Investment Thesis

The COVID-19 pandemic has thrown global supply chains into disarray. Many companies will be looking to reshore operations in North America to avoid being caught flat-footed a second time if a major international crisis affects global supply chains. WPT Industrial Real Estate Investment Trust (OTCQX:WPTIF) is well positioned to benefit from this reshoring trend. COVID-19 has boosted the reliance of consumers on e-commerce highlighting the importance of regional distribution centres. WPT Industrial has a diversified portfolio of high quality tenants, including leading e-commerce oriented firms such as Amazon.com Inc. (AMZN) and FedEx Corporation (FDX). Supported by a stable tenant base and consistently high occupancy, WPT Industrial offers consistent monthly income through its 5.6% distribution paid in $USD.

Company Profile

WPT Industrial REIT is a Canadian-domiciled REIT focusing on owning and operating U.S. industrial properties. The company has 102 properties spanning 32.1M square feet across 20 U.S. states. WPT has been focused on growing its U.S. footprint, by expanding from its core NE and U.S. Midwest markets into the logistics hubs of the Denver, Seattle, San Francisco, Salt Lake City and Phoenix.

Source: WPT Industrial

WPT trades on the Toronto Stock Exchange as “WIR.U” and “WPTIF” on the OTCQX. While domiciled in Canada, WPT units pay distributions and trade in $USD. The $CAD denominated listing is “WIR.UN” on the TSX. Headquartered on Toronto’s Bay Street, WPT has an experienced leadership team and a Board of Trustees that includes former real estate executives from RioCan REIT (OTCPK:RIOCF), Cadillac Fairview Corporation and Oxford Properties. WPT Industrial has the backing of large institutional investors, including the Alberta Investment Management Corporation “AIMCo” and the Canada Pension Plan who invested-in and joined WPT in joint ventures in 2016 and 2018, respectively.

Industrial REITs

Even prior to COVID-19, the industrial real estate segment has been especially strong with a record USD $100B in transactions registered in 2019. Real estate services firm JLL estimates that the global demand for new industrial space will exceed three billion square feet over the next decade. This demand is likely to be centred on distribution centres in urban areas designed to serve e-commerce clients competing for rapid delivery to customers.

While units of WPT saw steep declines along with the broader market earlier this spring, units prices have since recovered to approximately 90% of their 12-month highs. This compares favourably to the broader Canadian REIT Index that is currently trading near 70% of its pre-COVID-19 highs. This quick recovery speaks to the resilience of the Industrial REIT sector and the quality of the company.

According to a recent article in REIT Magazine, Industrial REITs are thriving.

The perception is that COVID-19 benefits e-commerce, requires more inventory of emergency supplies in warehouses, and benefits onshoring in the supply chain because the last thing we want is to rely on China or some other country for supplies when we need them

As a segment, industrial REITs are positioned to perform well throughout the COVID-19 pandemic. In the U.S., industrial vacancy rates have stayed below 5%, new inventory has been absorbed quickly, and rent collection rates have remained high.

Benefiting from e-Commerce

The COVID-19 pandemic has prompted an increase in e-commerce activity for many consumer goods. One estimate from Signifyd Inc. suggests that online sales increased by 40% between May 26 and June 1, when compared with the period between February 24 and March 1. This dramatic increase has forced many online retailers to add new industrial space in short order. This demand has had a significant impact on short-term and long-term demand for industrial real estate.

Industrial leasing in the first quarter of 2020 was at a three-year high with strong demand coming from distribution and logistics tenants. Distribution centres have been key to the ongoing growth of e-commerce. Logistics facilities in particular have accounted for the majority of the industrial space added in the segment over the last five years.

Source: NAREIT

Growing Footprint

WPT Industrial REIT has grown rapidly from its IPO in 2013 through a combination or organic development and targeted acquisitions. WPT has recently acquired land and properties in Houston, Portland and Minnesota. The REIT has three other projects under development in the Minneapolis, Chicago, and Houston markets.

Source: WPT Industrial

In February 2020, WPT raised approximately USD $271M in a successful equity offering that utilized the full over-allotment option of the offering. WPT used the proceeds to acquire a portfolio of 26 industrial properties and one land parcel from PIREIT for USD $730M. The deal, which closed on March 26, 2020, represents an increase of 39% to WPT’s gross leasable area and brings the size of company’s portfolio to approximately USD $2.3B. Importantly, this transaction enables WPT to enter high-barrier-to-entry coastal markets, including New Jersey, California, and Florida, which are key distribution hubs. This acquisition is a substantial transformation for the REIT and propels it towards an enterprise size where the company can take advantage of its scale to realize operating efficiencies.

Following this substantial acquisition, the firm has signalled that it will be evaluating non-core properties for disposition in 2020 and 2021. While there was not significant overlap in tenants between the existing portfolio and the PIREIT portfolio, the transaction was large enough that WPT will be able to identify properties that no longer fit the growth direction the REIT has identified. This capital recycling effort will result in the firm using proceeds to strengthen the REIT’s balance sheet and fund its future development pipeline.

Operational Performance

Prior to COVID-19, WPT posted quarterly NOI growth of 3-4% throughout 2019. In Q1 2020, NOI growth slowed to 1.4%. WPT Industrial REIT enjoyed occupancy rates above 99% throughout 2019. By the end of Q1 2020, occupancy had dropped to 97.3%. Approximately 1% of this decline in occupancy can be attributed to the impact of COVID-19, while the remainder results from the addition of new properties to the portfolio in Q1 2020.

As a result of 2019 and 2020 acquisitions, revenue from properties in Q1 2020 grew 28.9% over the same period last year to $32.5M. In the first quarter of 2020, FFO and AFFO were USD $0.184 per unit and USD $0.137 per unit, respectively. This represents a per unit increase of 4.5% to FFO and 11.4% to AFFO from the same period in 2019.

Distributions

WPT pays a monthly distribution of $0.0633 for an annual payout of $0.76/unit in $USD. This payout represents an attractive 5.6% distribution yield for investors seeking monthly income. WPT is especially attractive for Canadian investors as they can earn monthly income in $USD without leaving the TSX. For other Canadian-listed companies that pay dividends in $USD, please see Canadian Investors Can Get Paid In USD With These Great TSX-Listed Dividend Names.

Source: WPT Industrial

The REIT’s current distribution has been held steady since its last increase in 2015. In the first quarter of 2020, WPT paid out 108% of adjusted cash from operations. Between 2018 and 2019, WPT’s payout ratio averaged 96% of ACFO, leaving little room for near-term distribution increases. The firm will likely allocate additional capital to operational growth and balance sheet strengthening rather than distribution increases.

Table Source: Author, Data Source: WPT Industrial

Risk Analysis

REIT operations are largely debt financed, so it follows that credit terms and debt load are typically the REIT’s most significant risk factor. WPT has an average interest rate of 3.3% between credit facilities and mortgages with the majority of debt coming due post-2026. The REIT has 52.1% total debt to book value with a debt to adjusted EBITDA ratio of 8.5X. While these debt levels have risen from 37% debt to book value and 7.5X debt to adjusted EBITDA from Q1 2019, the company’s cost of capital is attractive, and its debt is therefore not a significant concern at this time.

On the Q1 2020 earnings call, CFO Judd Gilats confirmed the REIT had approximately USD $112M available through a credit facility, in addition to cash on hand of USD $50.4M. In March 2020, supplemental to this operating liquidity, WPT amended the REIT’s unsecured credit facility increasing capacity from USD $575M to USD $1.175B to pursue acquisitions.

WPT is well diversified both geographically and through its tenant base. With properties located across 20 states, WPT is not over-exposed to any adverse economic condition affecting a particular region. FedEx is WPT’s largest tenant representing approximately 13% of base rent. No other tenant represents more than 4% of base rent, and the ten largest tenants account for approximately one third of base rental revenue and leasable space. WPT’s tenants are typically large multinationals who tend to be better positioned to endure COVID-19 induced business interruptions than smaller tenants would be. Some smaller tenants have asked for rent relief during COVID-19. These requests amounted to approximately 15% of total tenants in April and May. On the most recent earnings call, WPT had confirmed that approximately two thirds of those that requested rent deferrals had paid their rents. As of the last earnings call on May 14, 2020, the company collected 97-98% of April and May rent.

Investor Takeaways

WPT Industrial REIT has a high quality property portfolio that is well positioned to benefit from booming demand for logistics and distribution centre needs. The alignment of WPT’s portfolio with macroeconomic trends, including the growth of e-commerce and the current reshoring of North American supply chains, is as strong tailwind for continued NOI growth. The company’s rapid growth and strong operating metrics support a consistent monthly distribution paid in $USD. WPT offers investors a combination of attractive current income and potential for capital appreciation.

Disclosure: I am/we are long RIOCF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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