The quarterly reshuffling of the pack across the FTSE drew my attention to the FTSE 100’s latest incumbent, LondonMetric Property (LSE: LMP).
Here’s why I’ll be snapping up some shares the next time I have some funds to spare.
Diversified real estate investment trust (REIT)
As an investment trust, the business benefits from perks such as paying no corporation tax. In exchange for this lovely gift, it must return 90% of its profits to shareholders.
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.
The business invests in and makes money from properties across the London region. Unlike many REITs out there, it has a diversified set of assets, including logistics, healthcare, office spaces, entertainment, and convenience.
Over a 12-month period, the shares are up 12% from 174p at this time last year, to current levels of 195p.
The good stuff
I was instantly drawn to the diversification of the assets it holds. Its £6.2bn strong portfolio doesn’t have all its eggs in one basket, and the business has proven to be savvy in changing tack when needed. A prime example of this is investing heavily into logistics properties to make the most of the e-commerce boom in recent times.
The beauty of diversification is that one area of strength, like logistics properties, can offset weakness in another, such as office space lately.
Moving on, LondonMetric has a great record of performance and growth. Although I understand that the past is not a guarantee of the future, it’s hard to ignore.
For example, recent FY24 results showed earnings per share had grown once again. Plus, the business continued its growth plans to seal two new deals to bolster its portfolio of properties. Furthermore, from a safety view, the business boasts a 99.4% occupancy rate and an over 19-year average lease expiry. This safety net can help earnings visibility, and hopefully keep the dividends rolling in.
Speaking of returns, the shares currently offer a dividend yield of 5.5%. For context, the average yield for the FTSE 100 index as a whole is 3.8%. However, it’s worth remembering that dividends are never guaranteed.
Bearish aspects and final thoughts
One (very) small concern of mine is the current valuation. On paper, the firm’s net assets equal 191p per share, and the shares are currently trading for 195p. There is a chance I’m slightly overpaying for the shares when I do buy them, or growth is already priced in.
Another concern is debt levels and current interest rates. When rates are high, like now, debt can be costlier to service. Plus, REITs like LondonMetric use debt to fund growth. There are two issues here. Firstly, higher debt repayments could hurt profitability and returns. Lastly, growth could be trickier to navigate with costlier financing due to higher rates. I’ll keep an eye on developments, especially as there are murmurings of an interest rate cut.
Moving the bear case to one side, I reckon there’s a great stock to consider, with solid fundamentals and diversification for protection.
With more than 40% of its assets in logistics, which is a burgeoning market with continued growth on the cards, the future looks bright to me.
