Real estate investment trusts (or REITs for short) are understandably popular with investors thanks to their commitment to returning a large proportion of profits to shareholders in the form of dividends.
With this in mind, let’s look at two examples — both of which reported interim numbers to the market this morning — and ask whether either can help you achieve financial independence.
Massive demand
A huge rise in demand for warehouse space from blue-chip companies over the last few years has driven many investors to build positions in Tritax Big Box (LSE: BBOX). The £2bn cap trust owns, manages and develops logistics facilities in the UK and counts Tesco, Unilever and Marks & Spencer among its tenants.
Over the first six months of the year, the trust’s net asset value (NAV) grew by 3.3% to 133.3p per share. Pre-tax profits soared by just under 50% to £80.53m helping it to outperform the return generated by the benchmark UK Global Real Estate Index.
At £2.1bn, Tritax’s total portfolio is now valued just under 11% more than it was at the end of 2016. During the interim period, it acquired three new sites and two new customers. The trust now owns 38 assets (covering almost 20m sq ft of space), all of which were let or pre-let and income producing during six months to the end of June.
Looking ahead, I see no reason why it shouldn’t continue to benefit from the explosion in online retail and wholeheartedly agree with the trust’s Fund Manager, Colin Godfrey, that the development of this logistics market “remains in its infancy“.
So, how about those dividends? Today, Tritax declared a payout of 3.2p — 3.2% higher than that declared for the previous six-month period — and remains on track to hit a target of 6.4p per share for the full year. At today’s share price, this would equate to a yield of around 4.3%.
Despite trading at a premium (149p), I think Tritax would be a great purchase for any investor committed to achieving financial freedom through dividend reinvestment over the medium-to-long term.
Vulnerable to Brexit?
Also reporting interim results today was Derwent London (LSE: DLN) which owns and manages a £4.8bn portfolio of roughly 6.2m sq ft in the capital’s West End and City borders.
Over the six-month period to the end of June, its NAV per share rose 0.9% to 3,582p. Net rental income increased by 9.2% to almost £80m compared to the same period in 2016 with the vacancy rate of its portfolio falling from 2.6% to 1.9%.
Thanks to £500m of disposals or forward sales above book values so far this year, Derwent claims to have a “robust” financial position. Net debt fell by 19% over the interim period. The trust also boasts cash and undrawn facilities of up to £446m.
Despite all this, the shares aren’t for me.
While today’s 25% hike to the dividend is undeniably attractive, Derwent’s forecast 2.4% yield for the year is far lower than that offered by Tritax. Thanks to its focus on owning assets in the capital, the former also presents as a riskier buy in my opinion, particularly as we crawl ever closer to our scheduled departure from the EU in March 2019. With so much political uncertainty abound, the current valuation of 32 times forward earnings just feels too rich.
