A real estate investment trust (REIT) is a unique way for investors to get exposure to the property market. At the same time, REITs can be appealing for income hunters, due to the requirement for REITs to pay out a high amount of earnings as dividends.
Here’s one example I’ve found with a dividend yield over 8%.
Making the business case
I’m talking about the Social Housing REIT (LSE:SOHO). Over the past year, the share price is up 17%, with a current divdiend yield of 8.18%. The company owns and manages specialist supported housing. These are typically let to local housing associations on long-term leases, with rent reviews often linked to inflation. This is good from an investor perspective, as it provides visibility into future cash flows and revenue that can rise in line with inflation.
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Another appealing factor of the REIT is that tenants receive rental funding ultimately underpinned by UK local authorities and the central government. So I don’t see the default risk as high at all. This provides another level of comfort regarding the sustainability of revenue. The portfolio currently has 492 properties, so even if one contract does fall through, it’s diversified enough to take the impact.
The latest results showed resident occupancy stable at 86%, with rent collection at 91.4%. Although some might want occupancy levels at 100%, from my experience it just isn’t realistic. Anything above 80% is good in my book and shows there’s a huge amount of space being utilised.
Dividend thoughts
The interim results saw the dividend per share increase 3%, the first increase since 2022. It has been paying out stable levels of income for years, but the tick higher is always pleasing. The yield would be higher, but the rise in the share price has moderated, given that the share price is a factor in calculating dividend yield.
The dividend cover is 1.2x, which is a good sign. Any figure above one shows that the company can cover the current divdiend payments fully from the latest earnings per share. As long as this number stays above one, I don’t see any threat the dividend will be cut.
Risks to note
As with any company, there are concerns. Even though the portfolio’s broad, it’s all concentrated in the UK. So if we see a shift in demand or a change in how the government structures social housing, it could seriously impact the REIT. Another point is the leverage the business has, with debt needed to fund new projects. If interest rates stay higher for longer, it could cause investors to readjust expectations of profits due to higher debt servicing costs.
Ultimately, I think this REIT’s in a great place right now. I’m seriously thinking about buying, and think investors can consider doing the same.
