Let’s Talk Logistics Real Estate –
Part One: Inflation

Part One:
Inlfation

Retirement investors have a long wish list of what they’d like in an investment. Many want a few performance factors such as high return potential, protection from downside losses, and a steady source of income. They also want an investment with relatively inexpensive fees. Oh, and it should fit into their retirement plan.  

While many investments check a few of these boxes, NOYACK NLI logistics REIT is tremendously valuable because it checks all of them (and more). To understand each factor, Let’s Talk Logistics is a new series that examines one aspect in each article where our logistics REIT adds value. Our first piece is focused on inflation.

Inflation 101

Simply put, inflation is a rise in prices. This rise generally occurs because of lower supply (e.g., difficulty in acquiring goods) or higher demand (e.g., more customers). Inflation is an important investing concept because it erodes your investment return’s value. Imagine that both your return and inflation are 7% for a year. While you earned a return, it’s only allowing you to maintain the amount you can purchase rather than increasing it. If inflation’s higher than your return, you can even have less purchasing power than when you started.  

Inflation has recently reached its highest annual level in four decades, which has made the concept a high-priority topic. Many retirement investors rely on investments that provide a consistent cash payout to fund their needs, so inflation could threaten their standard of living. 

How other investments fare against inflation

Overall, stocks hold up better than bonds to inflation. Many bonds pay a consistent amount of interest over a given period. Few adjust this amount for inflation, and those that do (Treasury Inflation-Protected Securities) often have minimal return opportunities. Meanwhile, many stocks pay consistent income via dividends, and each has a dividend growth rate: A measurement of the payout’s annualized percentage increase. In other words, high-dividend growth stocks are inherently designed to increase their payouts, which can help to offset inflation.  

But these investments aren’t foolproof protection. A company’s dividend is tied to its performance, so dividend growth could lag inflation in periods of poor economic performance. Some experts fear that we’re entering a recession, so high inflation could continue at a time when companies lack the revenue and profits to maintain a dividend increase.

Our Logistics REIT offers superior inflation protection

In general, real estate protects against inflation because it’s a hard asset, or something that’s tangible and therefore holds an intrinsic value. Since property owners need significant time to create more land and shelter (supply), property owners can raise rent prices in response to inflation with minimal impacts to demand. Further, most REITs have a few characteristics that aid in their protection from inflation:

• Short-term leases allow more property owners more opportunities to raise rent in relation to inflation.
• Triple-Net Leases shift the operating costs of a property to the tenants, so as these input prices rise with inflation, property owners pass off these expenses rather than using their cash flows for increased costs.
• Long-term fixed-rate debt contracts allow property owners to capitalize on the stability of bond interest. When high inflation occurs, owners can earn higher prices in rent while maintaining the same interest rate.

Further, NOYACK’s Logistics REIT has unique properties that provides even better inflation protection. We select logistics and warehouse properties that are leased under special long-term contracts. These contracts include stipulations that require annual rent raises in accordance with the CPI index, which is a common measure of inflation change over time. Our logistics REIT, therefore, grows in lockstep with inflation. 

Investors are also well-suited to take advantage of this inflation protection via income returns. We distribute at least 6% of our portfolio’s value annually to investors, which itself is notably larger than the roughly 3% yield on public REITs. Inflation-driven rent increases will raise the value of our portfolio and therefore the amount of a 6% annual distribution. 

Further, investors can maintain this income growth while maintaining high earnings potential. We target a 16% to 18% investment rate of return (IRR), which is significantly higher than the historical performance of stocks and bonds.

Want more?

Future articles in this series will dive into the various ways that our logistics REIT can add value. Some factors that we’ll cover include wealth preservation, volatility, tax advantages and fees. Come back every other Thursday for a new deep dive.