What This Hot New REIT IPO is Telling Us About the Market

Investing in real estate investment trusts, or REITs, can help you gain exposure to the real estate sector at a low cost. Through REITs, you invest in companies that own and operate a portfolio of cash-generating real estate properties. 

Typically, REITs use debt to fund their expansion plans while paying shareholders a tasty dividend. Interest rate hikes since the start of 2022 have driven REIT valuations lower, as investors are worried about the rising cost of debt. Plus, higher bond yields have made dividend stocks less appealing to investors.

However, the rising possibility of lower interest rates in the next 12 months should make investing in REITs a solid choice, as the asset class provides portfolio diversification and a generous dividend yield. Here's a look at one hot new REIT IPO (initial public offering) you might want to consider right now. 

Lineage REIT Goes Public

Last week, real estate investment trust Lineage (LINE) went public, debuting at $82 per share and valuing the company at $19.2 billion. Lineage is a cold storage REIT that sold 57 million shares and raised $4.44 billion in its IPO, making it the world’s largest public issue in 2024. 

LINE is only the second REIT to go public since 2022, and debuted amid an IPO market that's been fairly tepid, with recent entries like sneaker company Golden Goose delaying their offerings amid an uncertain environment. 

However, with the Fed getting ready to ease and the artificial intelligence (AI)-fueled data center megatrend drawing fresh investor attention to the REIT space, LINE has made a splash with its IPO.

Valued at close to $21 billion, Lineage partners with food and beverage companies to store, handle, and transport frozen or perishable food products. With 482 warehouses and 3 billion cubic feet of capacity, Lineage is a real estate giant that ended 2023 with $5.3 billion in sales. 

Lineage emphasized the capital raise will help it fund the company’s growth and lower balance sheet debt, both of which should drive future cash flows higher. Since 2008, Lineage has made 116 acquisitions. Its acquisition-oriented growth has accelerated in recent years given the REIT undertook 75 acquisitions since 2020. 

Is Lineage a Good Stock to Buy?

Lineage has some lofty goals, as it aims to transform the global food supply chain and eliminate waste. It generates sales from storage rental fees as well as from product handling and other services. 

The REIT's temperature-controlled warehouses are located near critical distribution centers. These warehouses are primarily in North America, with an emerging presence in Europe and Asia-Pacific. They serve 13,000 customers worldwide. 

A research report from Technavio forecasts the global frozen food market to grow by $133 billion between 2022 and 2027, providing Lineage with enough room to expand the top line. 

While Lineage reported a net operating income of $443.4 million in Q1, its balance sheet debt is quite high, at $9.3 billion. It needs to generate enough cash flow to service this debt, as debt payments are estimated to total $3.7 billion through 2025. 

Another risk factor for Lineage is its customer concentration. In the March quarter, its 25 largest customers accounted for 32% of total revenue, while 34 of its warehouses are single-customer locations. 

In its prospectus, Lineage stated, “If any of our most significant customers were to discontinue or otherwise reduce their use of our warehouses or other services, which they are generally free to do at any time unless they are party to a contract that includes a minimum storage commitment, we would be materially and adversely affected.” 

Lineage might seem overvalued at first glance, but it is among the largest players in a highly fragmented market, and should outpace the broader markets in the future.