Bolstered by recent asset management initiatives and steady like-for-like rental income growth, property investment and development company LondonMetric (LSE: LMP) posted an upbeat set of first-half results today. The real estate investment trust (REIT) said its underlying earnings in the six months to 30 September rose by 14% to £28.8m, while net asset value (NAV) per share was up 4% from March 2017 to 155.7p.
Strong results helped LondonMetric to deliver a 3% increase in its dividends to 3.7p per share for the first half, with dividend cover up slightly from 112% in the same period last year, to 114%. Assuming a similar increase in its dividend for the remainder of the year, which would be in line with the consensus analysts’ forecasts, shares in the REIT trade on a prospective yield of 4.3%.
Demand continues to grow
LondonMetric’s property portfolio has held up better than most in the sector, helped by its focus of distribution space. Despite ongoing Brexit uncertainties, occupational demand for distribution space, both large and small, remains strong, due to the shift happening between retail and online shopping. At the same time, the company’s largely de-risked development programme has also added to income growth and valuation gains.
Looking ahead, I’m very excited about LondonMetric dividend growth potential as its future earnings prospects are underpinned by the favourable sector outlook and its attractive short cycle of new developments. It has seven properties under construction right now, with a further four in the pipeline, which could potentially add more than 1.5m sq ft to its portfolio over the next two years.
Discount
Value investors looking for an opportunity to buy into a quality REIT at a discount should probably instead consider Derwent London (LSE: DLN).
The London office-focused REIT is attractively valued, with shares trading at a 24% discount to its net asset value (NAV), despite continuing to deliver robust earnings growth and having one of most attractive development pipelines in the central London office space.
Of course, investors are concerned about the impact of Brexit, but much of Derwent London’s portfolio is in the West End or the Tech Belt in central London — locations that are typically less exposed to the financial services industry. They are also invested in assets that have low capital values and modest rents, with good medium-term potential for improvement.
And so far, Derwent London’s rents and property valuations have held up well — like-for-like net rental income increased by 5.6% in the first-half of 2017, while NAV per share increased 0.5% in 2016 to 3,551p. Further gains are likely on the successful execution of two projects for delivery in 2019. What’s more, the vacancy rate also remains very low, after falling slightly from 1.9% in June to 1.4% at the end of September.
The stock has a regular dividend yield of just 2.2% this year, but City analysts expect its forward-looking yield will climb to 2.4% by 2018.