While the ongoing stock market correction has many investors understandably on edge, it’s enabled dividend yields to reach fairly impressive levels.
In many situations, the impact of inflation will likely make these increased yields unsustainable. However, there are some exceptions, creating buying opportunities for shrewd long-term investors.
Here’s one British stock whose market capitalisation is getting slashed, despite cash flows actually expanding along with dividends.
Lucrative logistics
Warehouse REIT (LSE:WHR), as the name suggests, is an owner and operator of warehousing facilities across the UK. The group targets dilapidated but well-positioned industrial real estate for acquisition. After investing some capital to spruce up the place, it then leases it out to businesses at a premium to historical rates. It then returns the bulk of profits to shareholders via a tasty 5.9% dividend yield.
Over the last 12 months, the share price hasn’t exactly been a stellar performer. In fact, the stock has fallen by more than 30%. What’s going on?
Being a real estate investment trust, the valuation of this business is strongly correlated with the underlying value of its assets. And with rising interest rates causing the real estate market to cool off, its property values have been dropping.
Yet, this may not be as disastrous as it seems. If management decided to sell off its properties in the current climate, then the downward trajectory of its net asset value (NAV) would indeed be problematic. Yet, the business model is primarily oriented to lease rather than flip properties. And with an average rental contract spanning over five years, leasing operating income remains uncompromised.
Looking at its latest interim results, occupancy has suffered slightly yet remains at a sturdy 92.7%. And in spite of the unfavourable environment, underlying operating profits have grown modestly, enabling management to increase dividends to shareholders.
A high-dividend yield isn’t risk-free
The firm primarily caters to businesses operating within the e-commerce industry. Therefore, the majority of its properties are used as fulfilment centres. When consumer spending was high, business was booming. But now that a cost-of-living crisis has taken hold, online spending is suffering a significant slowdown. And the effects on Warehouse REIT aren’t negligible.
In the long run, e-commerce will likely continue to become a more significant part of the retail space. And as more goods are bought and sold on the internet, demand for logistics facilities will grow. That’s why this UK share could be a lucrative source of passive income for the next decade.
However, in the short term, things are a bit murkier. Inflation is slowly falling, but reaching the ideal range of 2.5% could take a while. And depending on how long this process may take, some tenants may choose not to renew their leasing agreements.
Needless to say, that would compromise the group’s current dividend yield. But with shares trading at a 27% discount to the group’s NAV, it seems this fear is already priced in.
So short-term volatility may lie ahead. But the solid long-term prospects, paired with a seemingly cheap valuation, make this a company investors may want to consider for their income portfolios.
