Considering Lineage IPO? This industrial REIT is a better buy

If you’re the kind of investor who pays attention to upcoming real estate first-timers, you’ve no doubt heard about the recent industrial cold storage REIT IPO. Line (LINE 0.50%). Although it has one person who bought its IPO and is currently trading it, I have many doubts about this particular REIT, as well as an additional REIT that you should consider if you are looking for stable dividend income in the long term. that you can actually rely on.

Line: first impressions

When I started looking through the original files for Lineage, I was horrified by the amount of its debt. The burden was high compared to the REITs launched and definitely caught my eye. But since the IPO was able to raise more than enough to pay off much of the interesting part of the debt, maybe it wasn’t as big of a problem as we thought. We’ll see how the company manages its debt going forward.

But, two other major concerns remain:

Lineage does not own all of its buildings

Despite being an absolute behemoth of a cold storage REIT, Lineage doesn’t own many buildings. Almost 24% of the warehouses that Lineage operates from are leased. According to the filings, the weighted average remaining term for these buildings is 23 years, but a lease, even a very long one, is never as certain as outright ownership of the building.

When you rent out your rental property, it can create a lot of problems. For example, let’s say you agreed to sign a series of leases with a very optimistic mindset about the future of your industry. What happens when there’s a downturn and you can’t get enough tenants or revenue from those properties to break even?

But back to the leases, the even bigger issue is that Lineage may not be able to continue operating in the same location if the landlord decides not to renew or terminate the lease early. For some types of businesses, this is not a big deal. Offices, for example, don’t like to move, but they can survive.

Logistics operations, on the other hand, require very specific conditions. It may need to be near a rail service or a port, or it may need to be in a particular city for a large tenant with manufacturing there. What happens when the owners of that building get a better deal and there is no other facility to jump to?

It may be an unlikely scenario, but given the narrow niche that cold storage represents, maybe not.

Short-term rentals are the norm

Unlike other industrial REITs, which often operate under very long triple-net leases where the lessee is responsible for maintenance and taxes, line leases are short by default. This is partly because the company often leases space by the pallet rather than by the building, but also because it has used a large amount of on-demand and month-to-month contracts. These contracts allow tenants to pay nothing if they don’t use the facility that month and to quit their leases with one month’s notice.

Lineage says it has converted these unstable leases to leases with minimum storage guarantees — meaning a company pays a minimum amount even if it doesn’t use the space — but only 41.8 percent have made the switch since March. 31, 2024.

So, for now, this practice exposes potential investors to a greater risk of loss, should there be an economic downturn that reduces demand for cold storage, or another competitor emerges that may cause these companies to commit to cold storage contracts. longer term rental by stealing them. from Lineage in a way that is harder to beat.

An alternative: STAG Industrial

Instead of buying new stock to say you have something shiny and new, why not consider old, reliable and safe stock?

STAG Industrial (DEER 1.53%) it may be a smaller industrial REIT, but not only does it own its own buildings – each of them – it only has a monthly lease tied to a tenant with a longer-term lease. The other leases have a weighted average lease term of approximately 4.5 years starting Q4 2023.

The largest percentage of leases renew between 2025 and 2027, but it also has 145 of its 739 leases (nearly 20%) scheduled to renew in or after 2030.

I don’t know about you, but I buy REITs for a stable, reliable source of dividend income and long-term potential for stock appreciation. There is nothing that screams security to me as much as long-term leases with some of the world’s largest companies in buildings that my REIT actually owns.