Most of the shares in the FTSE 250 aren’t known for offering generous dividend yields. After all, these smaller enterprises are usually focused on growth. But there are several exceptions to this rule. And one such company from my passive income portfolio currently offers an impressive 6.1% yield that continues to grow!
E-commerce is still a thing
With fears of a recession still on the rise, the businesses linked to e-commerce have been hit hard lately. And it makes sense. As consumer discretionary spending drops, online sales volumes have suffered. Pairing this with multiple interest hikes and the market value of warehouse properties has also followed the downward path.
With that in mind, it shouldn’t be surprising that Warehouse REIT (LSE:WHR) has watched its share price drop by over 30% over the last 12 months. As a quick reminder, the company is a warehouse operator. The management team focus on finding and acquiring dilapidated properties in prime locations. It then invests in sprucing them up a bit before renting them at premium prices, primarily to e-commerce enterprises.
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The group’s latest results show occupancy has only dropped by around 1% to 92.7% since this macroeconomic storm started. This resilience stems from its average lease duration before the first break, which stands at 4.4 years. Even if a recession were to come around, I’m sceptical it would last nearly half a decade.
As such, cash flows remain intact. In fact, they’re still growing despite the adverse operating conditions. That’s why management just boosted its third-quarter dividend from 1.55p to 1.60p per share. And when combined with a falling market cap, the dividend yield has been elevated to impressive but seemingly sustainable levels.
A 6.1% dividend yield has its risks
Even if Warehouse REIT’s tenants are contractually obligated to continue making rent payments, there remains the risk of default. After all, companies can’t pay with money they don’t have. And depending on the severity of the potential looming recession, the risk of late payment could be significantly elevated. This is especially true given that the company primarily caters to small and medium-sized businesses.
It’s also worth pointing out that Warehouse REIT’s share price is highly correlated with its net asset value (NAV) – the market price of its property portfolio. Continued interest rate hikes will most likely drag real estate valuations down further, taking the FTSE 250 stock’s market cap with it. While this will push the dividend yield higher, reversing the drop in share price through dividends may take a long time.
That said, Warehouse REIT’s NAV currently stands at 151.7p per share. Compared to the current share price of 106.8p, the stock market has already priced in a substantial property devaluation.
In other words, the impact of rising interest rates is already baked into the share price. And personally, 30% seems excessive, especially considering the critical resource warehouse space has become for e-commerce retailers. With the long-term online shopping demand likely to keep rising, this looks like a buying opportunity in my eyes. And it’s why I’ve already added some shares to my portfolio.
