Shares in Warehouse REIT (LSE:WHR) currently come with a dividend yield of just below 8%. That means a £15,000 investment today could generate a second income of £1,170 this year.
The rise of e-commerce has created strong demand for warehouses, especially in the best locations. But, while I think this is here to stay, the overall situation is a bit more complicated.
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Challenges
A high yield can be a warning sign – and there are risks with Warehouse REIT. Most obviously, the company is paying out 6.4p per share in dividends while making 5.4p in adjusted profits.
Over the long term, that’s not sustainable and the firm has been making moves to rectify this. Part of this has involved divesting non-core assets, raising £74.4m over the last nine months.
It has also abandoned the development of a building project in Crewe after its pre-let tenant pulled out. And it’s in the process of selling this, with a view to bringing down its debt levels.
Strengthening its balance sheet should bring down the firm’s borrowing costs, boosting profits in the process. But in terms of growth, it isn’t particularly positive.
Rent increases
Growth is often a challenge for real estate investment trusts REITs. They don’t have a choice about distributing their rental income to shareholders and this can make it hard to fund new investments.
In its most recent update, however, Warehouse REIT outlined some pretty strong growth figures. The firm reported 25 deals, with rents up 32.5% on average.
By any standard, I think that’s very impressive. And it reinforces the point that demand is still strong for industrial properties in the best locations.
This is Warehouse REIT’s biggest natural advantage – space in the best locations is limited and it can be hard to build new facilities. That makes assets in these locations extremely valuable.
Share count
One of the ways REITs finance their growth is by issuing stock. But shareholders need to look carefully at what kind of return the company is getting on its investment.
Warehouse REIT is a complicated one in this regard. The number of shares in issue has increased from 166m in 2019, to 426m at the end of its last financial year.
That’s a 157% increase and during that time rental income has only grown by 57%. That’s not particularly impressive, but there’s more to the story than this.
The company’s share count has been stable since 2022 and rental income has continued to rise. As a result, investors might think the equation is more attractive than it has been previously.
Should I buy the stock?
With Warehouse REIT, the big risk is the lack of dividend cover. But the company is making moves to address this and the core of its portfolio appears to be doing well.
The threat of a rising share count is real, but things have been very stable recently. I might well buy the stock, but the risks mean I’m unlikely to make it a big part of my portfolio.
