FTSE 250 stocks are typically known as smaller growth-oriented enterprises. But there are quite a few exceptions to this reputation. And the index has a wide range of real-estate-focused firms that offer impressive dividends.
One from my portfolio is Warehouse REIT (LSE:WHR). And management just released its latest interim results, which maintained shareholder payouts, locking in a 7.7% yield at today’s valuation. Is now the time to start buying more shares? Let’s take a closer look.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
What happened to the share price?
A quick glance at this stock’s share price chart shows that the last 18 months have been pretty rough. With interest rates pulverising property prices, the firm’s net asset value (NAV) has been tumbling. And with it, the stock price followed.
However, for income investors, this downward momentum is less concerning. The primary business model of Warehouse REIT is to buy and lease warehouses, primarily for the e-commerce industry. And while the latter has suffered in light of inflation, the latest earnings from businesses like Amazon and Shopify signal that the operating environment for online retailers is improving significantly.
In other words, demand for leasing warehouse space for online fulfilment is back on the rise. And that’s clearly reflected in Warehouse REIT’s latest earnings. Net asset value has returned to growth, albeit by 1%, and a 31.8% bump in rent for its new tenants has been achieved. Does this mean now’s the perfect time to start buying shares?
A point of contention
While demand doesn’t appear to be a problem, dividends are still in a bit of a tight space. As previously mentioned, interest rates have been climbing as the Bank of England fights inflation. Consequently, a lot of the firm’s originally cheap debt has gotten quite expensive to service. And in November 2022, management unveiled plans to start disposing of underperforming assets to raise funds and pay down its loans.
These disposals seem to be going well. A total of £94.3m worth have now been completed, most at a significant premium to book value. This has helped further reduce its pile of outstanding loans & equivalents to £295m, versus £348m a year ago.
While seeing gearing improve, it’s also come at a cost. The disposal of certain assets has offset the gains made in higher leasing rates, causing the contracted rent to slip by 3.3%. After all, these properties are no longer generating rent for the business. As a result, dividend coverage is pretty tight.
To buy or not to buy?
Management expects coverage to improve in the coming years as debt exposure continues to drop. However, further interest rate hikes, or a sudden drop in demand for warehousing, might be enough to tip things over the edge and require the company to cut shareholder payouts.
Personally, I remain optimistic about the long-term potential of this enterprise, especially since well-positioned warehouse space is in short supply. Having said that, I’m going to wait and see.
There’s a bit too much risk of a potential dividend cut risk now, in my opinion. But should coverage improve, I may start bolstering my position.
