REITs (real estate investment trusts) have had a rough few years. With interest rates rising sharply from their near-zero levels throughout the 2010s, highly leveraged real estate stocks fell out of fashion in 2022. And most still haven’t recovered.
But that’s precisely what makes the current environment so interesting for income-focused investors. For those willing to look past the noise, some of the most compelling passive income yields in the entire FTSE 350 are hiding in plain sight right now.
And one business in particular has caught my attention.
An income machine quietly firing on all cylinders
LondonMetric Property (LSE:LMP) is one of the UK’s largest triple net (NNN) lease REIT. The business owns and manages an £7.6bn portfolio of logistics warehouses, convenience retail, healthcare facilities, and entertainment assets. But its NNN speciality is what makes it truly fascinating.
Why? Because it means tenants are required to pay the vast majority of operating, maintenance, and tax expenses. It makes this commercial landlord’s income model exceptionally clean and efficient. And the numbers from the latest full-year results back this up.
Net rental income rose 16.6% to £455.3m and underlying earnings climbed 13.9%. The dividend was raised for the 11th consecutive year by 3.8% and is still comfortably covered by profits, translating into a juicy 6.9% yield.
The portfolio is also well-positioned for the structural trends that matter most. Logistics now accounts for 53% of assets, urban logistics rent reviews grew 38% on market reviews over the year, and a contracted rental uplift pipeline of £38m is already locked in for the next two years.
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So where’s the risk?
The main concern for any REIT investor is leverage. And even LondonMetric isn’t immune. With a loan-to-value (LTV) ratio of 36.7% and £2.7bn of new or refinanced debt activity in the year, the balance sheet carries meaningful exposure to interest rate movements.
Yet to be fair, management’s done an impressive job insulating the business. A staggering 99.8% of debt’s hedged, the blended cost of debt is held at 4%, and there’s no material refinancing required until as early as 2029.
However, if rates remain elevated for longer than expected, then property valuations could face renewed downward pressure, which would dent the net asset value even if the income stream holds firm. And that’s now looking increasingly like a genuine possibility given the inflationary pressures from the Middle East conflict.
Put simply, the macroeconomic environment for REITs is uncertain. And even LondonMetric’s own results note that liquidity in the real estate investment market remains constrained for larger lot sizes. In other words, if LondonMetric’s forced to sell a property to cover its debts in the future, it might have to sell at a discount.
The bottom line
Concerns about real estate liquidity and interest rate exposure are why LondonMetric shares are currently trading 10% below the firm’s net asset value.
However, this nervousness, while understandable, seems a bit overblown given the quality of LondonMetric’s tenant list and asset portfolio. And with the dividend yield now hovering near its highest point in almost 15 years, this genuinely looks like a once-in-a-generation opportunity to consider.
That’s why I’ve already added it to my own passive income portfolio.
Should you invest £5,000 in LondonMetric Property Plc right now?
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Zaven Boyrazian owns shares in LondonMetric Property.
