Warehouse REIT (LSE: WHR) only announced its inclusion in the FTSE 250 back in September. And the shares are already down 27% since then! However, I think this dividend stock now has a very attractive priced, which is why I’ve recently been scooping up some shares.
A perfect storm
As a reminder, Warehouse REIT invests in and manages warehouse assets in urban locations across the UK. It predominantly leases these sites to small and medium-sized logistics and e-commerce companies. It distributes most of the money it receives to shareholders. The stock now has a dividend yield of 5.8%.
The company has faced howling headwinds across most of 2022. Firstly, Amazon warned earlier this year that it had over-expanded its warehousing needs and was looking to dispose of some space. Most warehouse and logistics REITs fell in response to this news.
Then there have been wider recessionary fears and specific concerns over falling real estate prices. And interest rates continue to rise, creating further long-term uncertainty. Plus, there’s the possibility of plunging e-commerce demand during a recession, which adds risk to its occupiers’ operations.
Given this perfect storm, it’s easy to see why the stock has fallen 36% year to date.
Long-term future looks bright
Despite all these ongoing concerns, I think the long-term investment story remains compelling. The UK urban warehouse market is supported by highly favourable long-term trends centred around e-commerce growth.
Warehouse REIT has a diverse occupier base, ranging from local businesses to household names such as John Lewis. And just this week, the warehouse operator announced it had boxed off another four long-term lettings, totalling 121,400 square feet.
These occupiers include PWR Europe, a developer and manufacturer of cooling services, which will use the location as its new European headquarters on a 20-year lease. Meanwhile, Superbike Factory has signed a 10-year lease at a site in Milton Keynes.
Paul Makin, investment adviser to Warehouse REIT, commented: “The UK warehouse occupier market remains in robust health, reflecting the breadth of tenant demand in a market beset by structural undersupply. Where rents remain affordable, particularly in the regions where the company’s portfolio is concentrated, there is no sign of this supply-demand imbalance easing.”
Deep value
The value of Warehouse REIT’s portfolio is over £1bn, as of 30 September 2022. But its share price has now become detached from its net asset value, meaning it’s trading at a discount to the total value of its assets. This may offer some margin of safety for new investors.
The group has successfully raised shareholder dividends every year since hitting the public market back in 2017. Of course, in and of itself, this is no indicator of rising future income, as any dividend could be cut at any time. And five years isn’t a a particularly long time in public markets.
But it is an encouraging sign that management is executing on its long-term strategy of increasing the income of long-term shareholders.
I think there is a significant mismatch — and therefore opportunity — between the risk the market is assigning to the stock and the actual prospects for the warehouse operator. And I’m actively building a position in this income stock to take advantage of that potential opportunity.
