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2 UK stocks to buy now to hedge against inflation

Inflation in newspapers
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As we enter October and Spooky Season, it is inflation that is spooking me as an investor. Britain’s inflation rate rose to 3.2% in August. Not only is this the highest level since 2012 but with supply chain problems, it’s not hard to see this spiralling further. I’m on the lookout for stocks to buy now to protect my portfolio from inflationary pressures. 

I see an opportunity in two real estate investment trusts (REITs): Warehouse REIT (LSE:WHR) and Tritax Big Box REIT (LSE:BBOX).

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Why REITs?

There are two reasons that I see REITs – particularly warehouse REITs – as potential protection from the worst effects of inflation to my portfolio.

Reliable dividends – REITs don’t pay corporation tax on profits and capital gains, which supports their ability to pay progressive dividends to shareholders. Additionally, there is usually a positive correlation between inflation and rent, consolidating a REIT’s ability to grow their business and thus the dividend. Both Warehouse Reit and Tritax Big Box offer attractive yields at 4.23% and 3.07% respectively.

Covid-19 has accelerated e-commerce growth – there looks to be a seismic shift from high street retail to e-commerce, and this has caused demand to skyrocket for warehouse space. With limited supply of warehouses and booming demand, there’s potential to grow market rents.

Warehouse REIT

Warehouse REIT’s portfolio nearly doubled in size in the year to 31 March 2021. The portfolio valuation now stands at £792.8m and occupiers of its warehouses range from local businesses to household names, including Amazon, Argos and John Lewis.

With its diversification in occupiers and assets, the company reports 95.6% occupancy of its warehouses and 98.6% rent collection. It also boasts a total accounting return of 27.7% in the year to 31 Mar 2021.

Tritax Big Box

Tritax Big Box is a much larger REIT with a total portfolio value of 4.89bn. It is a component of the FTSE 250 and with returns of 33% in the past year, it’s hard to ignore this REIT in terms of stocks to buy now. Its customers also include Amazon as well as Tesco, Unilever and Rolls-Royce.

There’s a lot to like about its H1 2021 results, with the company’s profit before taxation up 264.3% compared to a more challenging H1 2020 as the pandemic struck.

What is particularly interesting here with the backdrop of rising inflation is that 41% of its customers’ rent roll up for review over the next 18 months. This should support sustainable earnings growth and progression of the dividend.

Risks and rewards

Both companies are trading at a 10-15% premium to net asset value.  The cocktail of e-commerce and inflationary tailwinds mentioned above make sense of this premium but I will be keeping a close eye on this trend.

Another concern for me is that to fund new acquisitions, both companies have raised capital through share issuance programmes, causing stock dilution. Although I believe in the long-term growth potential of both companies, short-term hits to the stock are likely.

I believe that the two stocks offer diversification for my portfolio. If inflation is here to stay, my belief in the positive outlook for the warehouse sector will boost my conviction in these companies, keeping them on my stocks to buy now list for a while yet.

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Nathan Marks owns shares in Warehouse Reit and Tritax Big Box. The Motley Fool UK has recommended Tritax Big Box REIT and Warehouse REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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