Even as the stock market reaches record highs, there are still plenty of top-notch income stocks offering attractive yields. And one company that I’ve got my eye on right now is LondonMetric Property (LSE:LMP).
With interest rates remaining elevated, real estate businesses aren’t being shown much love from investors. After all, these enterprises carry a lot of debt that’s become significantly more expensive to service compared to a few years ago.
In the case of LondonMetric, this shift in investor sentiment has dragged its share price down by over 30% since the start of 2022. Yet, that also means the stock’s yield has increased significantly and now stands at a market-beating 6.4%.
Here’s why I’m planning to go against the crowd and buy more shares in what I believe is a bargain passive income opportunity.
Resilient rental income
As a quick crash course, LondonMetric is a commercial landlord with a diversified portfolio of properties scattered across the country. This mostly consists of logistics warehouses, retail stores, and hotels, as well as other, more niche property types like private hospitals and theme parks.
Like other real estate investment trusts, the firm’s balance sheet carries a significant chunk of debt and a relatively small amount of cash. In fact, as of March, the group’s financial position consisted of £2.1bn of debts & equivalents versus only £42m in cash.
On the surface, that screams high liquidity risk. But in reality, this high degree of financial leverage isn’t as problematic as most investors might assume. That’s because, as a landlord, LondonMetric generates a steadily and consistent stream of cash flow each and every month.
This is more than enough to cover both its debt interest as well as an ever-rising shareholder dividend. And since its lease agreements span on average for 17 years, and often include annual adjustments for inflation, this cash flow is not only consistent, but seemingly resilient as well.
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What could go wrong?
Given that most of the group’s tenants tend to be large and established enterprises like Tesco and Amazon, the risk of late rental payment seems low.
However, prolonged economic weakness and low growth could ultimately result in tenancy agreements being cut shorter than expected or simply not being renewed. This risk is only being amplified in 2025 with concerns of new potential property taxes in the soon-to-be-released Autumn Budget.
As a specialist in triple net lease agreements, LondonMetric is not directly on the hook for any new potential real estate taxes. Instead, that responsibility is shifted to its tenants. Yet again, this increase in financial pressure could indirectly adversely impact cash flows.
In the worst-case scenario, management may be forced to sell off some of its real estate assets, potentially at a discount to reduce its debt burden. And that could also mean dividends might end up on the chopping block.
However, with such a stellar track record of navigating through cyclical downturns in the real estate market, that’s a risk I feel is worth taking. Even more so, given the impressive yield and undemanding price-to-earnings ratio of 11.3. That’s why I’m planning on topping up my existing position. But this isn’t the only income stock I’ve got my eye on right now.
