A real estate investment trust (REIT) is a type of income stock that pays out 90% of its profits to shareholders in the form of dividends. I think these are ideal shares for generating a second income from my portfolio.
Here’s one FTSE 250 REIT yielding 6% that I’d buy today.
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Portfolio turnover
Warehouse REIT (LSE: WHR) specialises in buying up and leasing out warehouse storage and logistics space to businesses. This is a market that is benefitting from the long-term growth of e-commerce.
The trust owns some 90 estates across the UK. Its occupants range from start-ups to the likes of Asda, John Lewis, and DHL.
In a trading update last month, it said that it sold two distribution estates for £29.5m. This generated an ungeared internal rate of return of 9%.
In total, it has completed £54.7m of sales during the second half of this financial year. It will use a chunk of this cash to reduce its net debt of £337m (some of which is variable-rate).
Separately, the company also finished the £3.9m construction of an open storage scheme at Midpoint 18 off the M6 motorway in Cheshire. Brit European, an international logistics firm, has agreed a 15-year lease for the purpose-built facility. This will generate annual rental income of £0.3m.
Another result of this turnover is that its portfolio vacancy has now been reduced. The occupancy rate is up to 95.9% (on 28 February) from 92.7% last November.
That’s a healthy figure, suggesting that the trust is in good shape to continue paying dividends.
Property price risk
Nevertheless, the stock is down 37% over the last year.
The reason is that the UK industrial real estate market suffered a 26% fall in value in the second half of last year. That was its steepest ever drop, according to the MSCI UK Quarterly Property Index.
This means that most REITs have slashed the value of their property portfolios. Nobody knows how long this slump will last.
Furthermore, there’s a chance that an extremely sluggish UK economy could eventually impact the financial health of its occupiers. Even a trend as powerful as e-commerce is not immune to weakening consumer spending.
That said, I think most of these concerns are already baked into the share price. And the 6% yield is the reward for taking on these risks.
A grand a year in dividends
The forecast total dividend for the current year is 6.40p per share. That means I’d need about 16,000 shares at today’s price of 106p to generate a £1,000 second income. They would cost me around £17,000.
That’s a lot of money — much more than I have in the stock.
Plus, my own income portfolio is well diversified, as I know that no dividend payout is ever totally guaranteed.
The near-term outlook for Warehouse REIT remains uncertain. However, I remain bullish over the long run. I think online shopping and the demand for well-positioned logistics facilities will increase side by side. That bodes well for future rental income and dividends.
I received my latest payment from this stock only a couple of weeks ago. And I reckon it won’t be the last. I may even buy more shares this year sometime.
