Industrial property and the difference between a lease and a business

The shares traded at 138.49 this morning, +1.13% on the session. Property investing rewards patience with lease schedules more than it rewards views about interest rates, though the second gets far more airtime.

The mark-to-market spread

The most important number in a property company is often not disclosed as a number at all. It is the gap between what tenants are currently paying and what the same space would cost if leased today.

When market rents have risen well above in-place rents, the company holds a stack of future cash flow that arrives automatically as leases expire and reset. No development required, no acquisition, no cleverness. The leases simply roll.

That is a genuinely unusual thing to be able to buy: growth that does not depend on management doing anything new.

The two ways it fails

• Supply. New space delivered into the same submarket closes the spread before the leases roll. This is the real risk and it is regional rather than national, so national data will not warn you.
• Tenant credit. A spread you cannot collect is not a spread. Concentration matters more here than the headline occupancy suggests.

Rates matter too, of course, but mostly through the valuation multiple rather than the cash flow. I would rather own a closing spread at a worse multiple than a wide multiple on rents that are about to be competed away.

The work

I go through expiry schedules by year and by region, and I look at what is under construction within a sensible radius of the largest assets. It is dull and it is most of the edge available in this sector.

A property company's next three years are already written down in its lease schedule. Very few people read it.

Where I land

Long, because the spread here looks wide enough to survive a reasonable amount of new supply, and the expiry profile brings a meaningful share of it forward within a horizon I am prepared to wait for.

What would change my mind

Construction starts accelerating in the specific submarkets that matter, rather than in aggregate. Aggregate supply data has told me almost nothing useful over the years. The map is local, and so is the risk.