Today I will be speaking with Mike McDaniel, Vice President at Sealy Investment Securities. The thought for the day is E-commerce, more specifically its growth and how much further it has to go. There is a lot of money to be made in that area. The action is to find a way that you can participate in that growth. Whether it’s in the liquid, in a publicly traded market, or private investments. We’re going to be talking about one specifically with Sealy, but I am sure there are lots of ways you can jump on this bandwagon and make some money yourself.
E-Commerce Overview
E-commerce these days is a part of all of our lives. Every company has had a spot that they’re transacting. At this point, everyone is getting things delivered to their house. That said, 10 or 12 years ago Amazon started two-day delivery and it was a game-changer. Customers started to realize they could order something and receive it a few days later for relatively the same price as before. This created an ease of life for people that was a huge game-changer. And then we went from two days to one day, even overnight. Due to these advancements, e-commerce has grown quickly. I joined Sealy roughly five years ago and e-commerce made up 10% to 12% of all US retail sales. Today, post-COVID, Sealy retail sales are well above 20%. One of the statistics involved in that is our distribution warehouse space. For every dollar you spend online, it takes three times as much distribution space to get it to you. Therefore, if you’re going from 10% to 20%, we’ve done the double where we’re at and it’s going to continue to grow.
Ecommerce is booming and projections have put it out to continue to take away more and more from the traditional retail space. As a kid, I used to walk into a brick-and-mortar store to buy anything I needed. Whereas now you order things from a warehouse to the storefront and finally your house. As mentioned earlier, it takes three times as much distribution space to get it to you. For example, my 10-year-old son enjoys Dick’s Sporting Goods. We go to look for football shoes and he finds some he wants but they were the showcasing set up for them. The store now offers your size to be shipped to your house the next day and it comes from another warehouse. So again, that’s where that space is being utilized. It’s a lot cheaper to rent that warehouse space closer to the end-user than the traditional retail mall tenant spot. It’s great savings for companies and easier to distribute products.
Impact of COVID
The impact of COVID converted some customers who were traditionally resisting e-commerce. COVID pulled demand for delivery and the growth of e-commerce forward at least three to four years. Let’s say retail sales were 17% or 18% in March 2020 by now we’re up to around 20% which is where you would expect to be over two or three years. The reason for this is because we were all stuck in our house and our lifeline to get hand sanitizer, batteries, and cleaning supplies was to go online and order it.
On the other hand, my parents are baby boomers. They’re in their mid-70s and never wanted to use their credit card online. They weren’t comfortable online or sure of the security but COVID forced them to do it. After a while, they realized it was pretty convenient and they could pay the same price as delivered to the house. This transformation opened baby boomers, one of the largest segments of the population, to technological advancements. Now, these folks are buying hundreds of dollars worth of household items and having them delivered. For example, patio furniture delivered is much easier than hauling your truck to the store. All of that said, the pandemic had a neat effect on the e-commerce industry.
The other thing COVID did was make us run out of hand sanitizer, toilet paper, and other essential items that were being delivered from across the world. Those items became stuck in port cities so the US realized that just-in-time delivery was not going to work. That said, we needed to start onshoring those items to have them in stock and stored in a traditional warehouse. As of now, there is a deficit of over a billion square feet in this country that doesn’t even exist. What that leads into in the distribution space is pricing power, rents increasing, no supply, and a lack of space needed by companies.
Sealy’s Journey To E-commerce
Sealy is a 75-year-old family business in our fourth generation and 50 years exclusively in the distribution space. This isn’t new to us, we have understood e-commerce for a long time. We feel it provides the best risk-adjusted return in the real estate world. Because tenants are very sticky and don’t move often. It’s usually a triple net lease structure, meaning the tenants pay the taxes, maintenance, and insurance on the property. Not a lot of people pay attention to this sector so we like our setup. However, since e-commerce puts the wind in the sails of it, it is much more focused on the sector. The opportunity that we have focused on is being the landlord of these properties in infield locations in property types and value-adding properties. Value-adding properties are existing properties in great locations with something wrong in the cash flow or management. That is where our 75 years of experience comes in and we can buy below replacement cost in an infield location. We deal in an inefficient market in the size we buy, usually between 5 to 15 million. Anything below 5 million is your local country club group buyer and above 50 million is more of an institutional buyer. From there, we go around and gather up the grunt work to buy those properties, aggregate them together, and then sell those to the larger portfolios. The opportunity is to be the landlord to some of our anchor tenants such as Amazon, UPS, and FedEx. We are the landlords to those folks and last year we raised rents on the properties we own between 14% to 40% during COVID. In turn, we received 99.8% of our rental income last year during COVID. This means we had good tenants who pay the bills and for investors, they get their income. Consequently, we grew our net operating income by almost 19% last year. This means we will have some upside at the end too and growth in that value.
As of now, Sealy pays a 5.04% annual distribution that’s paid out quarterly. Divided out by four, it is taxed advantaged so we’re able to pass through the client for depreciation, amortization, and loans. The current income that is tax-advantaged now has growth on the backside or the ppm. We will make projections in the 10 to 14 range on an annual basis which is a healthy return. It can be boring but it is preferred to double your money in an eventful way. Realistically, it is diversification, real asset, hedge against inflation, and pricing power. We are more of an anchor of the portfolio to provide some ballast to rough seas ahead. We are setting new highs daily in the market. There are all kinds of options to diversify the portfolio and help out with some tax-advantaged income.
If you are interested in checking out other topics we discuss on the Thought & Action podcast, be sure to subscribe on Apple & Spotify!