Most of the time, when a stock has a 6.5% yield, there’s something I don’t like about it. But I think income investors should give LondonMetric Property (LSE:LMP) a second look.
It’s a FTSE 100 real estate investment trust (REIT) that owns a mixture of warehouses and long income retail properties. And unlike most REITs, it has some interesting growth prospects.
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Industrial distribution
Right now, just under half of LondonMetric Property’s portfolio is in industrial distribution. And over the last few years, that has been the place to be when it comes to real estate.
The growth of e-commerce has increased demand for warehouses. But it has also given rise to a surge in building, with the amount of available space in the UK increasing significantly.
In this situation two things are important. One is having long-lasting contracts and with its average lease having 17 years left until its first break, LondonMetric fares well on this front.
The other is having a portfolio that consists of quality properties in desirable locations. And some of the company’s recent deals have been focused on this.
Acquisitions
LondonMetric has been making moves to shift its portfolio towards warehouses. And the most recent is its deal to acquire Highcroft Properties – another UK REIT. I think this deal looks interesting. The plan is to retain the parts of the portfolio that consist of industrial warehouses (52%) and retail warehouses (27%) and divest the remainder.
The implied price for the company is £44m and Highcroft has around £23m in net debt. And its rental income is around £5.79m a year, which suggests a yield of around 8.5%.
LondonMetric is using stock to finance the deal, which will cause the share count to rise. But its own stock has a 6.5% dividend yield, so the transaction should add value for shareholders.
Risks
REITs have to distribute 90% of their rental income as dividends. Given this, I’m impressed at how LondonMetric has managed to grow its portfolio in ways that add value for shareholders.
There are however, some important risks. A large amount of the firm’s rental income comes from two companies – Ramsay Health Care and Merlin Attractions. Continued expansion through acquisitions should help reduce this to some extent, but I don’t see it going away entirely. And this is something shareholders should take note of.
I think the best way to manage a risk like this though, is to try and buy the stock when there’s a margin of safety in the share price. And with a 6.5% yield, this might be the case right now.
Income opportunities
LondonMetric’s been looking to increase its exposure to a promising part of the real estate sector. Importantly, it’s done this in a way that adds value for shareholders.
As I see it, growth is likely to be steady, rather than spectacular. But a 6.5% dividend yield might mean that the company doesn’t have to do much to be a very good investment.
Several UK REITs – specifically Assura, Care REIT, and Warehouse REIT – have been takeover targets recently. So I’m considering buying shares in this one while there’s still an opportunity.
