If you're the kind of investor who pays attention to upcoming first-time debuts in the real estate sector, you've no doubt heard about the recent IPO for industrial cold-storage REIT Lineage(NASDAQ: LINE). Although it has a following that has bought its initial offering and is trading it currently, I have a lot of doubts about this particular REIT, as well as an additional REIT you should consider if you're looking for long-term, stable dividend income you can actually count on.
Lineage: first impressions
When I first started digging through the initial filings for Lineage, I was appalled at its debt load. The burden was high compared to launched REITs and certainly caught my eye. But, as the IPO managed to raise more than enough to pay a big chunk of the concerning portion of debt down, it was perhaps not as big of a problem as I thought. We'll see how the company manages its debt going forward.
But, two other major concerns remain:
Lineage doesn't own all its buildings
Despite being an absolute behemoth of a cold storage REIT, Lineage doesn't own a lot of its buildings. Almost 24% of the warehouses from which Lineage operates are leased According to filings, the weighted average remaining term for these buildings is 23 years, but a lease, even a very long one, is never as secure as owning the building outright.
When you lease out property that you've leased, it can create a whole lot of problems. For example, let's say that you agreed to sign a number of leases with a very optimistic thought to the future of your industry. What happens when there's a downturn and you can't get enough tenants or income from those properties to break even?
But, going back to the leases, the even bigger problem is that Lineage may not be able to continue business in the same location, should the owner decide to not renew, or otherwise terminate the lease early. For some types of businesses, this is not a huge deal. Offices, for example, don't love to move, but they can survive it.
Logistics operations, on the other hand, require very specific conditions. They may need to be near a rail service or a port, or may need to be in a specific city for a large tenant with manufacturing there. What happens when that building's owners get a better offer and there's not some other facility to jump to?
Maybe it's an unlikely scenario, but given the narrow niche that cold storage is, maybe not.
Short-term leases are the norm
Unlike other industrial REITs, which often operate under very long triple net leases where the tenant is responsible for maintenance and taxes, Lineage leases are short by default. This is, in part, because the company often leases space by the pallet rather than by the building, but also because it has utilized a great deal 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 exit leases with a month's notice.
Lineage does say that it's been converting these wobbly leases to leases with minimum storage guarantees – that is to say, a company pays a minimum amount, even if they don't use the space – but only 41.8% have made the switch as of March 31, 2024.
So, for now, this practice puts potential investors at a greater risk of loss, should there be an economic downturn that reduces the demand for cold storage or another competitor arises that can get these companies to commit to longer-term leases, stealing them away from Lineage in a way that's more difficult to overcome.
An alternative: STAG Industrial
Rather than buying a new stock to say you've got something shiny and new, why not consider a stock that's old, reliable, and secure?
STAG Industrial(NYSE: STAG) may be a smaller industrial REIT, but not only does it own its own buildings – every last one of them – it has just one month-to-month lease tied to a tenant with a longer-term lease, as well. Its other leases have a weighted average lease term of approximately 4.5 years as of Q4 2023.
The largest percent of its leases renew between 2025 and 2027, but it also has 145 of its 739 leases (nearly 20%) set to renew in or beyond 2030.
I don't know about you, but I buy REITs in order to have a steady, reliable source of dividend income and a long-term potential for growth of the stock's value. There's nothing that screams security to me as much as long-term leases with some of the biggest companies in the world in buildings that my REIT actually owns.
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Kristi Waterworth has positions in Stag Industrial. The Motley Fool has positions in and recommends Stag Industrial. The Motley Fool has a disclosure policy.
