Shares in LondonMetric Property (LSE:LMP) have fallen by around 35% over the last 12 months. As a result, the 5% dividend yield makes it attractive from a passive income perspective.
The falling share price is the result of a decline in the market value of UK property, especially warehouses. Despite this, rental income remains strong and I think the stock is a good investment.
What it does
Let’s start with what the company does. It’s a tax-efficient Real Estate Investment Trust (REIT) meaning it makes money by owning and leasing properties to tenants.
About 75% of LondonMetric Property’s buildings are warehouses and industrial distribution centres. The other 25% are retail properties, mostly grocery stores.
According to its last earnings report, around 99% of the company’s buildings are occupied. Its tenants are a diverse bunch, with none accounting for more than 4% of the company’s total rental income.
The stock currently pays the aforementioned dividend of 5%, which has been growing at 12% per year over the last decade. I think this makes it something investors looking for passive income should keep an eye on.
Why has the share price been falling?
In general, business at the company looks good to me. So the obvious question is why has the stock has been falling over the past year?
One reason is interest rates have been rising in the UK. That’s been making the cost of borrowing more expensive, causing demand – and therefore prices – to fall in the UK property market.
And warehouse owners have been hit harder than most properties in terms of market value declines. Over the last 12 months shares in Warehouse REIT have fallen by 42% and Segro is down 43%.
The biggest reason for this, in my view, is Amazon’s announcement that it was looking to offload some of its excess warehouse space. This is a risk for UK warehouse REITs for two reasons.
First, excess supply on the market creates a headwind for prices. Second, Amazon is one of the biggest tenants of UK industrial properties.
The stock looks like a bargain
I think there are a number of reasons for income investors to look seriously at shares in LondonMetric Property. Whether or not the stock has further to fall, it feels to me like a bargain at today’s prices.
The most obvious reason is that rental income remains strong. As I see it, this is much more important for dividend investors than the market value of the company’s assets.
Second, there’s a long-term tailwind behind the industry. The steady rise of e-commerce should mean demand for warehouses stays strong for some time.
Plus, industrial distribution centres are difficult to compete with. Space for building new warehouses in key areas is limited and location is crucial.
And building new warehouses is expensive. This means high inflation, including rising costs for materials, creates another barrier to entry for competitors.
A stock to buy
In my view, this is a stock that investors looking for passive income should seriously consider. The drop in the share price looks like an opportunity to me.
I already have a heavy REIT exposure in my portfolio. When the new ISA season comes around, I’ll be looking carefully at buying the stock myself.
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