Real estate investment trusts (REITs) have lost a lot of affection from investors in recent years as higher interest rates pushed up borrowing costs and made property income look less exciting. But despite this weak sentiment, there are still several corporate landlords that remain in tip-top shape.
Some are even using their size and recurring cash flows to expand their real estate empires even further, driving more growth and ever-higher dividends. That’s why, right now, my personal favourite passive income opportunity is a REIT.
Why? Let’s dig in.
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A FTSE 100 commercial landlord
LondonMetric Property (LSE:LMP) owns and manages a diversified real estate portfolio focused on logistics, convenience, healthcare, entertainment, and other mission-critical assets. And by specifically targeting industry titans, the lease durations tend to be long, and the rental payments are on time.
Pair that with the group’s unique focus on triple-net-leases, where tenants are responsible for maintenance, insurance, and taxes, operating costs are near negligible.
The result? Industry-leading profit margins and exceptional revenue visibility. And at a 6.63% yield, £1,000 invested today would instantly start earning roughly £66.30 in passive income overnight.
So is this a no-brainer?
Weak share price, strong business
Last month, LondonMetric published its latest full-year results for the 12 months ending in March. And the numbers didn’t disappoint. Net rental income rose by 16.6% to £455.3m while underlying rental earnings were up 13.9% to £305.3m.
In turn, dividends once again received another 3.8% boost to 12.45p, continuing the group’s decade-long hiking streak of cash-covered shareholder payouts.
That kind of progress matters. Usually, a high yield’s a warning sign of profit weakness. But in the unusual case of LondonMetric, it’s the opposite.
Occupancy is at 98%, the average outstanding lease duration is 17 years, 99.8% of its borrowings have now been hedged, and its average cost of debt sits at 4%.
Put simply, both the balance sheet and dividends look rock solid. And in the words of CEO Andrew Jones, “our relentless expansion has put us in a strong position with every reason to be optimistic.”
Needless to say, this all sounds rather perfect. So what’s the catch?
What could go wrong?
Even with strong execution and skilled leadership, LondonMetric nonetheless has weak spots. Like most REITs, the business remains highly sensitive to changes in interest rates. Existing debt might be hedged, but rates also impact property values and make new borrowings more expensive.
Consequently, it becomes much harder for the business to continue to expand its empire at pace. But the challenges don’t end there. Cheaper property valuations also put downward pressure on rental rates.
The group’s long-duration leases help offset this impact. But when leases are up for renewal, it makes it harder for management to exercise rental pricing power. And in turn, dividend growth can come under pressure from multiple directions.
Still, in my opinion, this nonetheless looks like one of those rare income stocks where the headline yield is backed by genuine fundamentals that investors seem to be ignoring or, at least, discounting heavily due to weakened sector sentiment.
LondonMetric has scale, discipline, and a clear track record of compounding cash flows, and that is exactly the sort of setup I love to have in my passive income portfolio. That’s why I’ve already bought shares in this REIT.
Should you invest £5,000 in LondonMetric Property Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if LondonMetric Property Plc made the list?
Zaven Boyrazian owns shares in LondonMetric Property.
