Is There Room Left for Pure Industrial Real Estate Trust to Run?

After an incredible year, shares of Pure Industrial Real Estate Trust (TSX:AAR.UN) may be running out of steam.

office building

Over the past year, shares of Pure Industrial Real Estate Trust (TSX:AAR.UN) have performed exceedingly well. Shares increased by over 35% and now trade at a premium to tangible book value by close to 20%. Long-term investors have done very well by holding and remaining patient.

Should investors buy into this gem, or is it too late?

The industrial real estate space is an area of the market where investors have started to realize the hidden potential over the past year. What was a yield of over 6% close to one year ago has become a yield of no more than 4.5% as shares have increased in value over the past 52 weeks with no increase in the dividend.

The company, which once operated exclusively in Canada, has started to expand operations into the United States, thereby bringing in revenues in U.S. dollars, which translates to higher revenues in Canadian dollars. Over the past several years, the exchange rate between the two currencies has changed from close to par to approximately $1.30 for every US$1.00. Canadian investors in Pure Industrial Real Estate Trust (or PIRET for short) have benefited from this over the past few years.

While the strength of the Canadian dollar is closely tied to the demand for oil, investors must not forget the more obvious driver of value in this sector: interest rates. At record low levels, real estate companies looking to refinance or expand will have to do so at a higher rate of interest than may have been available in the past. An increase in interest rates may result in lower purchase prices and lower tangible book values for companies like PIRET.

Clearly, investors should not be purchasing shares with the expectation of receiving very much capital appreciation. Instead, investors need to be looking at this investment as a dividend play. The challenge this poses is that the very generous dividend from one year ago has been recognized, and investors have bid shares up to a price which makes this investment much less attractive. Investors should not forget that if rates rise even a little, then the risk-free rate of return begins to look a little more attractive in comparison to a stagnant yield for shares of PIRET.

As interest rates rise and investors are offered a higher yield for taking no risk, each company will have to adjust to ensure that the additional risk and reward continue to move in lockstep. In the case of PIRET, that could mean a decrease in the share price, which would lead to be an increase in the yield. The difference between the risk-free rate of return and the dividend yield will remain intact.

For investors looking for opportunity in the industrial real estate sector, it may be a good idea to look elsewhere, as the charging bulls may be running out of steam.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman has no position in any stocks mentioned.

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