Right now, I think the FTSE 250 is the place to be looking for UK stocks to buy. Since interest rates started rising at the end of 2021, the index is down 17%, compared to a 4% gain for the FTSE 100.
In general, higher interest rates have been a challenge for the property sector. And I think this makes the real estate investment trust (REIT) sector a natural place to be looking for opportunities.
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Real estate investing
Real estate investment trusts make money by owning and leasing properties. They return their cash to shareholders in the form of dividends, making them really interesting passive income vehicles.
The FTSE 250 has a number of REITs among its constituents. These include Assura, LondonMetric Property, and Urban Logistics REIT.
One that stands out at today’s prices is Supermarket Income REIT (LSE:SUPR). The stock has fallen by 37% since the start of 2022 and the dividend yield has reached 8% as a result.
If the company can maintain its distributions, then this could be a huge passive income opportunity. But is there more than meets the eye?
Overview
At first sight, things look pretty good. The company owns 55 properties, with a total value of £1.73bn and the average lease doesn’t expire for another 13 years.
All of its properties are occupied and its rent collection metrics are strong. On top of that, it has inflation-linked uplifts built into its agreements, which should help rents increase gradually over time.
Unsurprisingly, the firm’s tenant base is quite concentrated – more than 75% of its rent comes from Tesco and Sainsbury. But I’d prefer a few quality tenants over a broader range of less reliable ones.
With REITs in general, debt can be an issue, but Supermarket Income REIT has an investment-grade credit rating, which should help keep costs down. So, not much to worry about there.
The big red flag
The biggest concern that I can see with Supermarket Income REIT is its share count. It’s rising, which is never a good sign.
By itself, this isn’t much of a surprise – real estate investment trusts often finance their operations by issuing new shares. But in this case, the expansion is quite dramatic.
Since 2018, the company’s outstanding share count has increased roughly tenfold. Even by REIT standards, that’s a lot.
A higher share count makes the dividend per share more expensive to maintain. And while it’s worth noting that this has stabilised lately, investors should want to keep a close eye on the share count.
Buy, sell, or hold?
Supermarket Income REIT is on my list of stocks to keep an eye on at the moment. Specifically, I’m wanting to see what happens with its number of shares outstanding in future.
The rising share count might by the fact the firm has been offering a scrip dividend, allowing investors to receive dividends in stock, rather than cash. But with this now shelved, we’ll see what happens.
Supermarket Income REIT is the kind of stock I really like owning. And I used to have a small stake in the business in my investment portfolio, but I’ve come out of it to reassess.
For now, I’m going to watch carefully to see how things develop. While I’m not ruling out buying the stock in the future, I think there are better opportunities for me at the moment.
