Dividend stock Warehouse REIT (LSE: WHR) looks attractive to me because of its high yield.
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With the share price just below 81p, City analysts expect it to be almost 8% for the trading year to March 2025.
The company’s been selling some of its assets to reduce debt and finance costs. At the same time, the directors want to focus more on the sub-sector of multi-let warehouse properties.
So the property firm’s been choosing to dispose of single-let assets to raise the money for debt reduction.
Rising rents
Having more tenants per building tends to lead to a higher frequency of tenant changes and new lease agreements. That’s often a good thing because most of the time rents go up when the company arranges new leases.
The industry has a posh-sounding technical term for it: positive rent reversion. It’s a way of getting out of rental agreements locked at lower rates years earlier. So in a buoyant rental market, it’s an important tactic for Warehouse REIT.
On 24 June, the firm announced it has recently completed sales of single-let assets worth £57.5m in three separate transactions. Since November 2022, disposals have been worth just over £165m. Now, the overall portfolio has a 77% weighting of multi-let assets, up from 70% last September.
According to company spokesman Simon Hope, the “key” priority is to “rebuild” dividend coverage. In other words, to make sure net profits and cash flows cover the amount spent on shareholder dividends each year.
The company released its full-year results report today (25 June) declaring that “robust” operational performance drove improved earnings. For the 12 months to 31 March, operating profit rose by almost 9% compared to the prior year.
The directors held the total dividend flat and said the payment is 95% covered when profits on disposals are included in the calculation.
A resilient market
I think there’s some uncertainty and risk for shareholders here. My assumption is disposal profits may not happen every year in the future to cover the dividend. Meanwhile, the shareholder payment isn’t yet fully covered. So perhaps it will be reduced if things don’t work out as the company hopes.
As a rule of thumb, I prefer companies to raise their dividends a little each year – it’s a good sign of health in the underlying business. Therefore, Warehouse REIT looks a little vulnerable to me right now.
Nevertheless, chairman Neil Kirton said the industrial occupation market has been “resilient” and has driven like-for-like rental growth of just over 5%. The outcome has reinforced the directors’ “conviction” regarding the tilt towards the multi-let asset class.
Kirton reckons the multi-let market is structurally under-supplied regarding well-located, quality assets. Because of that, the business managed to start new rents around 30% higher than previous ones – it’s that ‘positive rent reversion’ in action!
Although there are risks, I see Warehouse REIT as worthy of further consideration now with a view to adding more of the shares to my diversified portfolio.
