Shares in Warehouse REIT (LSE:WHR) are up 11% over the last week. Positive reports about inflation and interest rates have caused the stock – as well as the broader sector – to jump.
Despite this, the FTSE 250 company’s share price is 25% lower than it was a year ago. I think there’s still a buying opportunity for investors here, but I wouldn’t wait around.
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Real estate investment trusts
Real estate investments trusts (REITs) make money by leasing properties to tenants. In exchange for tax advantages, they are required to distribute 90% of their profits to shareholders in the form of dividends.
I think owning shares in a REIT can be a great way of earning income from property. They allow investors like me to collect rental income without the work of maintaining buildings or finding tenants.
Different REITs own different types of properties, from supermarkets to surgeries. As its name suggests, Warehouse REIT focuses primarily on industrial distribution centres.
Right now, the stock comes with a 7.5% dividend yield. I see this as attractive, but with the share price moving higher, that return might not be on offer for long.
Warehouses
The rise of e-commerce – emphasised during the pandemic – has led to a surge in demand for industrial distribution centres. While that’s a good thing for a company like Warehouse REIT, it also comes with some drawbacks.
In particular, there’s a risk that the industry might be oversupplied at the moment. And if it isn’t right now, a recession that puts pressure on some tenants might cause that to be the case.
The problem for Warehouse REIT is that it’s harder to negotiate rent increases when tenants have options available to them. That could well make growth difficult going forward, which is challenging for REITs at the best of times..
Nonetheless, I think the stock is well worth considering. In my view, the 7.5% yield means the company doesn’t have to grow much in order to be a good investment.
Investment returns
7.5% is well above the yield on any government bond. So even if the company’s distributions don’t go up at all, I think the stock is worth considering as a passive income investment.
Of course, there’s a possibility that the dividend could get cut if the business gets into financial difficulties. But this looks unlikely to me, given the high occupancy rates and tailwind behind the sector in general.
The trouble is, the more the stock goes up, the worse the equation looks. As a result of the recent rally, the yield has already gone from 8.2% to 7.5% over the last week.
That’s why I think investors should think about buying shares in Warehouse REIT sooner rather than later. It looks like the stock is going higher and the chance to lock in an attractive dividend yield might not be around for long.
