Actual property funding trusts (REITs) generate profits by proudly owning and leasing properties. And the FTSE 100 has some nice examples, together with Land Securities Group, SEGRO, and Unite Group. 

Importantly, they distribute their earnings as dividends. And after an 8% fall over the past 5 years, shares in LondonMetric Property (LSE:LMP) include a 5.25% dividend yield.

Please be aware that tax remedy relies on the person circumstances of every consumer and could also be topic to vary in future. The content material on this article is supplied for data functions solely. It isn’t supposed to be, neither does it represent, any type of tax recommendation.

What makes a very good REIT?

The largest problem REITs face is development. They’re required to distribute 90% of the rental earnings they generate to shareholders within the type of dividends and this limits their reinvestment alternatives.

Meaning the choices for rising earnings are restricted. The 2 predominant methods are rising rents or elevating money to make acquisitions, both by issuing shares or taking over debt. 

Neither is simple, however the important thing to each is having a portfolio of properties which can be in excessive demand. This creates pricing energy and monetary flexibility. 

LondonMetric Property has a powerful place and the corporate’s observe file demonstrates this. And I feel the prospects for the long run additionally look sturdy.

Property Portfolio

LondonMetric Property has a portfolio that consists of warehouses, theme parks, and comfort shops. Importantly, these are areas the place demand has been sturdy. 

LondonMetric property portfolio

Supply: LondonMetric Property investor presentation

In consequence, the corporate’s portfolio is absolutely occupied. And it has generated spectacular development over the past decade – earnings have elevated by a median of 10% per 12 months since 2014.

A part of this has come from rising rents. And this seems set to proceed – the common lease has slightly below 20 years to run and the overwhelming majority have contractual uplifts inbuilt.

A sequence of mergers and acquisitions have additionally grown LondonMetric’s property portfolio. The newest of those – a take care of LXi this 12 months – has taken the corporate’s portfolio from £3.1bn to £6bn.

Steadiness sheet

The largest threat with LondonMetric Property might be its debt. The LXi deal has seen the corporate’s common price of debt enhance and the common time to maturity on its loans shorten.

LondonMetric property debt

Supply: LondonMetric Property investor presentation

Excessive rates of interest make each of these actual points. And it’s value noting that the corporate has the next common price of debt than Unite and a shorter common time to maturity than SEGRO. 

That places LondonMetric Property in a barely extra weak place than different FTSE 100 REITs. Nevertheless it’s additionally value noting that administration has been making strikes to enhance the scenario.

The agency has been divesting non-core property to scale back its complete debt. And promoting these at yields decrease than its common price of debt means it has been boosting its incomes energy in addition to its stability sheet.

Ought to I purchase the inventory?

At right now’s costs, LondonMetric Property shares have a 5.25% dividend yield. That’s increased than the three.59% common for the FTSE 100. 

The corporate’s property portfolio is one that ought to stay in excessive demand for a while. And the built-in hire will increase ought to assist the dividend develop. 

Finally, I feel that is an better-than-average firm with a higher-than-average dividend yield. That places it on the high of my checklist of FTSE 100 shares to purchase for long-term passive earnings.