April 26, 2022
Economic times are changing and interest rates are rising. Investors can use several strategies to reduce inflation risk. Real estate investment trusts (REITs) are one way to provide steady cash flow as well as competitive long-term returns. Unlike bonds, interest rates and real estate prices are not inversely related. Real estate value goes up, hand in hand, with inflation and rising interest rates because RE managers have the ability to raise rents.
Within the REIT sector, there are some options that provide better assurance of a strong yield rate, especially logistics and warehouse REITs in the US that invest in industrial assets. Here are some of the reasons to consider investing in not just any REIT, but a U.S. Logistics REIT.
REITs are an effective hedge against inflation because rent is typically more predictable than other essential living expenses. Long-term leases generally have built-in protection from inflation, and short-term leases are normally based on the current market. Furthermore, REITs maintain a portfolio of leases, some of which they renegotiate each year, allowing them to change the price even on long-term leases. REIT portfolios also appreciate in addition to price increases on leases since REITs own the properties in their portfolios.
According to Nareit, REITs have historically delivered good market returns and had a good fundamental operating performance during times of moderate inflation. Nareit’s analysis of REIT performance as compared to the S&P 500 between the 1970s and now shows that REIT returns outperformed the stock market in 56% of 12-month periods with high inflation, and over 80% of the 12-month periods that had high inflation that was continuing to go up.
According to Nareit, “REIT returns have been resilient through many separate periods of moderate inflation.” During the most recent 12-month period analyzed, total REIT returns for U.S. investors were 45%, significantly higher than the Consumer Price Index (CPI) growth of 6.2%.
The way that leases work in any real estate sector contributes to the ability of REITs to offer reasonable protection during inflation. Long-term leases have inflationary protection built in. Short-term leases also respond to inflation and can increase with the consumer price index. When it comes to specialized REITs that invest in industrial logistics or other industrial REIT investment vehicles, leases are also long-term and have built-in inflationary protection.
Investors receive the benefits of real estate investment along with the advantages of investing in stock when they invest in a REIT. REITs provide annual dividend-based income and investment returns that are typically higher than the stock market.
Each year, REITs must distribute 90% of their taxable income in the form of dividends. At the same time, they also produce long-term appreciation in share prices. The long-term results in share price growth that REITs can and do achieve come from the way they earn money through long-term leases or interest payments on property financing. According to Nareit, REITs provide “investors with historically competitive long-term rates of return that complement the returns from stocks and bonds.”
When it comes to investment portfolios, volatility is a concern. No one wants to see wild shifts in investment earnings or dividends. While every investment could potentially experience volatility, the way REITs are structured and the types of properties they invest in help to provide more stability in terms of dividend income and long-term earnings. REITs that are linked to equity or mortgages, or hybrid REITs that combine both, are able to weather economic volatility and tend to provide more stable returns and growth.
Industrial and logistic REITs are able to offer steady cash flow for several reasons. They invest in an essential part of the economy that includes light manufacturing facilities that make food and essential products. They also can invest in cold storage facilities, warehouses, and product fulfillment centers.
Income from logistics properties comes from long-term leases, which can extend to 25 years. Industrial leases also usually have triple-net leasing structures. Tenants are not only long-term, they also pay for building insurance, maintenance, and real estate taxes. The result is reliable, steady cash flow to the REIT as well as to investors.
In general, REITs are easy to buy and sell, in contrast to investing directly in real properties. They also have risk-adjusted returns that are attractive with dividends that outperform other types of investments. As part of a balanced portfolio, REITs can offer protection against inflation without the drawbacks of buying and selling real estate directly.
NOYACK Logistics Income REIT is leveraging the investment gap in infrastructure that supports the massive e-Commerce sector which has grown by 140% over the past five years. While e-Commerce businesses have undergone rapid growth and are now considered mature, the underlying infrastructure — warehouses, cold storage, healthcare, life science, and mobility hubs — has only had a 25% increase in investment.
With a target distribution of 6% annual dividends and a rate of 18 to 20% return each year, NOYACK Logistics Income (NLI) is a great choice to diversify investment portfolios. Through NOYACK NLI, investors can receive excellent investment performance with affordable fees at the same time as they are supporting essential parts of the U.S. supply chain and the future of e-Commerce.
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