UK REITs make for a sensible investment, I feel. If you’re not convinced about the rampant optimism pushing the FTSE 100 north of 6,000 points, especially so.
That’s because REITs — real estate investment trusts — have to pay out at least 90% of their income to shareholders in dividends. For you, this means a steady income stream through a variety of conditions. Markets flying? You get paid. Markets crashing? You get paid.
Most UK REITs buy up and rent out commercial property. They get tenants on long leases, which gives them strong visibility on future earnings.
And the dividend yields on offer can be pretty spectacular.
But picking the right REIT is a matter of thinking clearly about the sectors that will benefit from wider market conditions. Retail REITs that own shopping centres are a big no-no at the moment, for example. No Newriver REIT, then.
I’d look instead to the rapid growth of online shopping.
Alongside taking a slice of Amazon profits with the quality FTSE 100 fund Scottish Mortgage Investment Trust, I’d be looking at the back end. The order pickers. Those UK REITs that own and rent out giant logistics warehouses.
Tritax Big Box REIT rents its mammoth warehouses to the US e-commerce giant, as well as consumer staples behemoths Unilever and Tesco. The 5.1% yield Warehouse REIT is another popular choice and its share price has rocketed back to pre-crash levels. But a price tag of 18 times earnings may be a little steep for some.
I think you should be looking at Urban Logistics REIT (LSE:SHED) too.
In 2019, SHED had reported a near-doubling of its profits from £9.8m to £18.7m. And 2020 year-end results on 29 May showed a 20% hike in rental income and a 21% jump in earnings. It added 8% to dividends per share to reach 7.6p. That’s a healthy 5.3% yield with much further to grow.
It also has significant financial firepower. In April bosses snapped up seven distribution centres for £47m in centres including Aberdeen and Plymouth and added a £13m West Yorkshire NHS distribution centre to its portfolio.
CEO Richard Moffitt pointed out that Covid-19 had highlighted the importance of ‘last-mile’ distribution of essential goods. “This company is the only listed business giving investors ‘pure play’ exposure to urban logistics assets,” he added.
One thing to watch closely with such companies is the premium or discount to Net Asset Value (NAV). Every financial quarter, managers will tot up the value of all the assets a REIT owns. NAV equals the market value of a REIT’s total assets (mostly property, plus any cash it has) minus the value of its liabilities, such as mortgage payments and the like.
Care home investors like Impact Healthcare REIT present a long-term high-yield choice. This one pays out a 6.6% yield and will cost you just 9 times earnings, for example. An even stronger choice, for me, would be Target Healthcare REIT. It offers a healthy 6.3% dividend yield and is trading at an 8.2% discount to NAV. This is right up my street. Its share price in the last year has been at a 5.6% premium to NAV. Investors willing to pay more than the sum of its parts? That shows confidence is strong in its future.
I honestly believe a portion of your portfolio should be invested in UK REITs.
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Tom Rodgers owns shares in Scottish Mortgage Investment Trust. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Unilever. The Motley Fool UK has recommended Tesco, Tritax Big Box REIT, and Warehouse REIT and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.