With a yield of 8%, is this FTSE 250 REIT brilliant for passive income?

Our writer considers whether buying shares in one particular real estate investment trust is an excellent way of generating passive income.

| More on:
A mixed ethnicity couple shopping for food in a supermarket

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A popular way of generating passive income is from rental properties. A real estate investment trust (REIT) does this with a view to returning a large proportion of its profits to shareholders by way of dividends, another common method of earning a second income.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Generous returns

The Supermarket Income Real Estate Investment Trust (LSE: SUPR) operates a very simple business model. It buys stores and then leases them to supermarkets. It currently owns 73 shops in the UK and France.

For the year ending 30 June (FY24), it looks likely that the trust will pay a dividend of 6.06p. With a current share price of around 74p, this implies a yield of 8%.

However, to buy more supermarkets it has to borrow. This means its earnings are sensitive to movements in interest rates. And any increase in costs is likely to affect the value of the dividend paid.

But higher borrowing costs are unlikely to impact on the proportion of its profits that are returned to shareholders. That’s because a REIT must pay annual dividends equal to at least 90% of its profits for it to avoid having to pay corporation tax.

For FY24, analysts are expecting earnings per share (EPS) of 6.05p, which is more than the anticipated dividend.

Looking further ahead, EPS is forecast to be 6.14p (FY25) and 6.23p (FY26). In both years, the payout to shareholders is expected to be 98% of these figures.

As experienced investors know, dividends are never guaranteed. But with a REIT there’s some certainty as to the percentage of profits that are returned.

Balance sheet review

A look at the trust’s accounts, since it was formed in 2017, shows that it has spent £1.9bn (including acquisition costs) on buying supermarkets.

During the same period it’s written down these assets by a cumulative amount of £235m. This isn’t a cash item and doesn’t affect the rents received as these amounts are secured by contracts.

But a reduction in net assets could restrict its ability to borrow in future. And the commercial property market can be volatile, which could lead to further reductions in the value of its portfolio.

I suspect the level of write-offs explains why the trust’s share price has fallen by more than a quarter since June 2019.

Financial period (months)Amount spent on buying stores (£’000)Increase / (Decrease) in value of stores (£’000)
FY18268,653(3,753)
FY19102,3171,013
FY20157,26313,917
FY21570,34038,630
FY22388,41324,797
FY23377,311(253,211)
HY24 (6 months to 31.12.23)38,496(56,276)
All periods combined1,902,793(234,883)
Source: trust accounts / FY = 12 months to 30 June

Checking out

I’m a big fan of passive income and the idea of earning money from supermarket rents seems like a good one to me. Despite the threat of the internet, I think large grocery stores are here to stay.

Although the trust requires access to funds to expand, as of 31 December 2023, it had a loan-to-value figure of 33%. This tells me there’s plenty of headroom to borrow more.

And there appears to be an increasing trend towards sale and leaseback arrangements. Under these contracts, supermarkets sell their stores to third-parties and then rent them back. I think there will be plenty of opportunities for Supermarket Income REIT to expand its portfolio.

For these reasons — along with its generous dividend — I’m going to seriously consider taking a position when I next have some spare cash.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »