When it comes to finding income plays for my portfolio, property is one of my favourite sectors to explore.
The great thing about property stocks is that they are hands off. Managers do all the hard work of managing properties for you, and all you have to do is sit back and collect the income.
Real estate investment trusts also offer diversification, and you can buy and sell the shares when you please. Take New River REIT (LSE: NRR) for example. This trust owns a broadly diversified portfolio of property assets located around the UK and 1.9m sq ft of new space under development.
The elephant in the room here is New River’s exposure to the retail sector. Challenging retail conditions have sent the UK high street into a spin. CVAs — a process which allows retailers to cut rents and close unprofitable stores — have jumped 143% in 2018, while the number of insolvent retailers has hit over 3,200 since 2014.
However, while rising numbers of CVAs might be bad news for landlords overall, I believe investors are overreacting when anticipating the impact on New River.
Indeed, as they head for the door, investors have pushed shares in the retail REIT down to a five year low. The dividend yield has surged to 8%, and the shares now trade at a discount of 10% to book value.
Adapting to changes
According to the group’s first quarter trading update, it is coping well with the harsh retail environment. 96.2% of the overall portfolio is currently occupied, rising to 99% for the pub portfolio.
Management is looking to unlock value from underperforming retail assets by converting properties into residential units. Following a strategic review, New River is now planning to develop “up to 1,300 residential units adjacent to or above our retail assets over the next 5-10 years.” This forward planning, coupled with the group’s already well-diversified portfolio and market-beating dividend yield, leads me to conclude that New River could be a great addition to your portfolio for the next decade.
My love of property plays isn’t just limited to REITs. I’m also interested in cash-rich developers such as Bovis Homes (LSE: BVS).
Making shareholders rich
For the end of its 2017 financial year, Bovis reported a cash balance of £145m, just under 10% of its market cap. The City expects the group to distribute most of this money to investors over the next two years. A dividend per share of 102p is pencilled in for 2018, rising to 103p for 2019, equating to a dividend yield of 8.9% and 9% respectively.
Based on the fact that last year’s total distribution of 48p per share only cost £60m, compared to Bovis’s free cash flow of £154m, I estimate 2018’s payout will cost approximately £125m. Once again, cash generated from operations should easily cover the total.
Going forward, Bovis is well-placed to continue handing out cash to investors. The group is a leader in the construction of affordable homes, precisely the type of buildings the government wants to encourage. The firm’s expertise and dominant size in the sector means that it can achieve sector-leading profit margins of 12% (industry average is less than 10%) — it’s no surprise the enterprise has been subject to not one, but two takeover attempts in the past 12 months.
All in all, another dividend stock that I believe deserves further research.
