Londonmetric Property‘s (LSE:LMP) an income stock whose dividend yield is more than twice the FTSE 100 average of 3%. So investors could be in line for some beefy passive income in the years ahead.
As a newish shareholder, I’m certainly hoping this is the case. However, the first few weeks have been a bit of a bumpy ride, with the share price down 10.6% since late February.
That was when the Iran war started and inflation spiked, sending real estate investment trusts (REITs) like Londonmetric tumbling. The good news for new investors though is that this pullback has pushed the dividend yield up to 6.5%.
Here’s why I reckon the dip’s worth considering buying for passive income.
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Structurally advantaged
Londonmetric owns a £7.6bn portfolio containing 680 properties that currently generate over £450m in annual rent. These assets are in what it calls the “structurally supported sectors” of urban logistics, entertainment and leisure, convenience, and healthcare.
Top occupiers include Ramsay Health Care, Merlin Entertainments, Travelodge, Marks and Spencer, and Tesco. Due to the high quality and reliability of these tenants, Londonmetric boasts an impressive 98% occupancy rate.
What I like here is the REIT’s triple-net lease (NNN) structure. This is where the tenant takes on nearly all the financial responsibilities of the property, including insurance, tax, and maintenance costs.
Looking ahead, I’m optimistic that Londonmetric can build on its 11 years of rising dividends. Its average lease duration is 17 years, with 67% of rent having contractual uplifts in place.
These strong fundamentals should provide the stable, long-term cash flows to maintain a growing dividend.
Risks to be mindful of
As optimistic as I am however, there are a couple of key risks that I need to bear in mind. The main one is the prospect of higher-for-longer interest rates, which could make growing the portfolio more expensive, as well as raising debt refinancing costs in future years.
Another risk is a severe UK recession one day that heaps financial pressure on tenants. While I don’t envisage the likes of Primark and Amazon going anywhere, they could be forced to downsize if things got really ugly in terms of weak consumer spending.
Finally, Londonmetric has grown aggressively through acquisitions in the past couple of years, consolidating the REIT sector. However, there’s always a risk it overpays in future if it carries on with this strategy. And that might threaten the rate of dividend growth.
Passive income potential
For now though, everything seems to be on track. A recent trading update showed that rent increased around 16% to over £450m in the year to 31 March. And it snapped up four modern Premier Inn hotels for £47.8m.
CEO Andrew jones said: “Our all-weather portfolio continues to deliver excellent income growth as we benefit from our alignment to the winning sectors. We are reaping the rewards of this strategy, and it is wonderfully comforting to see our rental income flowing and growing to record levels.”
At the current price of 192p, £5k would buy around 2,603 shares of this REIT. And based on the current yield, they would collectively generate £325 in passive income.
