What does £500 buy in the current real estate environment? At today’s share price, it translates to around 290 shares of LondonMetric Property (LSE:LMP), offering a 5.5% dividend yield.
Considering that property prices are in decline, investing in this space may sound like a bad idea. But as many seasoned investors know, buying during a down cycle leads to higher returns when things start to improve.
In the meantime, shareholders can sit back and watch the money roll in. Because despite popular belief, demand for commercial real estate is actually rising. So much so that Londonmetric is still reporting double-digit growth in its rental income, pushing the dividend yield higher.
A focused landlord
LondonMetric’s business model is pretty straightforward. Acquire properties in prime locations and then lease them to companies who need the space.
Looking at its existing portfolio, around three-quarters consist of warehouses and other logistics facilities, with the rest comprising retail and leisure sites. And following some new acquisitions as well as disposals, management is shifting its portfolio even more into logistics.
Personally, I think this strategy is smart. While e-commerce may not be at the top of its game in 2023, continued economic recovery will ultimately start seeing online shopping activity ramp up. And, in turn, the demand for prime-positioned warehouses will likely rise, giving the company more pricing power in its rental fees.
In fact, the previously mentioned continued growth is already hinting that this has started happening.
With occupancy sitting at 99%, cash flow looks rock solid, in my eyes. Investors will have to wait until November for the next set of results to be released. Personally, I remain optimistic about the long-term income potential of this enterprise.
Everything has a weakness
Management is currently carrying a fairly impressive track record. Successfully identifying opportunities within the real estate sector has enabled cash flows to expand fairly consistently. And subsequently, dividends have been hiked for eight years in a row, so far.
However, as impressive as this is, it’s important to realise this was achieved in a near-zero percent interest rate environment. Buying commercial real estate isn’t cheap. That’s made perfectly apparent by the group’s £1bn pile of loan obligations on the balance sheet.
The business doesn’t appear to be at any risk of insolvency, thanks to the cash-generating nature of its operations. However, a higher cost of debt could make expansion far more challenging in the future. After all, the more the group is spending on servicing debt, the more pressure is added to the bottom line.
Nevertheless, the long-term demand for warehouses continues to trend upwards. And with few companies with a track record as stellar as LondonMetric’s, it’s a risk I feel comfortable taking. That’s why this income stock is already in my portfolio.