SEGRO (LSE:SGRO) is a FTSE 100 real estate investment trust (REIT) with a difference. Growth is a structural challenge for REITs, but this firm is finding a way around that.
The 4.2% dividend yield is high enough to be interesting without being spectacular. But the firm’s partnership model sets it apart from other similar dividend stocks.
REITs
REITs are required to distribute 90% of their taxable income to investors as dividends. This makes them attractive passive income investments, but it can limit growth potential.
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Cash returned to shareholders obviously can’t be used to buy more properties. So REITs typically have to raise debt, issue shares, or sell existing properties if they want to buy new ones.
There’s nothing inherently wrong with that, but it means doing deals to generate growth is more complicated than it is for other businesses. And that makes it riskier.
SEGRO has the same structural limitations as other REITs. But it’s been finding some innovative ways to generate portfolio growth while returning its cash to shareholders.
Partnerships
Some of SEGRO’S recent moves have involved joint ventures with partners to boost their portfolio. A good example is the deal the company did last year with Tritax EuroBox.
The FTSE 100 firm acquired six warehouses in a deal worth €470m, but it did this by putting up 50% of the cash in a joint venture. The other half comes from a Canadian pension fund.
Importantly, while SEGRO only owns 50% of the assets, it manages the entire portfolio. That means it collects fees for managing properties without putting up the cash to acquire them.
The company also has a JV focused on building data centres. And this could give it a big advantage over other REITs looking for exposure to a growing industry.
Potential sticking points
The partnership model increases SEGRO’s growth potential. But it can also create potential conflicts that aren’t there for REITs that have wholly-owned portfolios.
One of the most obvious is the possibility of partners disagreeing on what to do. This can create a risk of reduced flexibility and the firm being unable to move quickly.
Another is the potential of one partner needing to sell when the other doesn’t. In this situation, SEGRO might end up with lower returns because of another company’s problems.
There’s also the possibility of the firm having to offer potential opportunities to the Joint Venture rather than being able to keep them for itself. And this is also worth noting.
Growth potential
I think investors looking for passive income should take a close look at SEGRO. The dividend yield isn’t as high as other REITs, but it has some unusually good growth prospects.
When capital is constrained, partnerships can be an attractive way to expand without having to raise extra cash. And this is what makes the stock attractive, in my view.
SEGRO isn’t exclusively a property business – most of its portfolio is owned by itself. But a unique point of differentiation sets it apart from its rivals in a good way.
