Today I’m looking at two real estate investment trusts I’d consider buying for a retirement income portfolio.
Although the property market is cyclical, well-run property firms can provide a reliable long-term income. Both of the trusts I’m looking at here continued paying dividends throughout the financial crisis, albeit at a reduced level.
An overlooked dividend champion?
Commercial property group McKay Securities (LSE: MCKS) is a name you may not be familiar with. This £250m investment trust specialises in office and industrial property in London and the south east of England.
McKay’s share price rose by nearly 3% in early trade today, after the group said its adjusted pre-tax profit rose by 5.4% to £9.07m last year. Gross rental income climbed 5.1% to a new record of £21.84m, and the trust’s net asset value per share rose by 6.3% to 322p. This means that at the last-seen share price of 278p, the shares trade at a tempting 15% discount to their net asset value.
Dividend growth was also ahead of expectations. The full-year dividend has been lifted 11% to 10p, ahead of broker forecasts for a payout of 9.2p per share.
Why I’d buy
This company isn’t involved in the retail sector, where landlords are starting to see downward pressure on rents.
Demand for office and industrial property such as warehouses still appears to be strong. The trust reported a “record year of lettings”, with a 23.3% increase in contractual rental income on a like-for-like basis. Debt levels are also reasonably conservative, with a loan-to-value ratio of 31.9%.
The current market strength probably won’t last forever. But this looks to me like a well-run business at a reasonable valuation. The shares’ 15% discount to book value is paired with a dividend yield of 3.6%. I’d consider buying at these levels.
The best long-term income stock?
If you’re building a retirement portfolio, you might prefer to focus on stocks from the larger end of the market. One of the UK’s largest and oldest real estate investment trusts is FTSE 100 member British Land Company (LSE: BLND).
This £6.8bn group operates a mix of office and retail property, much of which is in prime locations in London and at major retail sites around the UK. Last week’s full-year results suggest that despite the problems being experienced by some major retailers, the group’s properties are holding their value so far. Property values rose by an average of 2.2%, while a £300m share buyback helped lift net asset value per share by 5.7% to 967p.
Underlying profit fell by 2.6% to £380m during the year to 31 March, as property sales put a dent in the group’s rental income. But the dividend rose by 3%, giving the stock a tempting yield of 4.3%. And the last-seen share price of 690p means that the stock trades at a discount of nearly 30% to its book value.
A buy for income?
I think that the pressure on retailers and retail landlords could continue for some time. But the group looks well positioned to handle this. Nearly 40% of its rental income comes from offices, and its retail sites are generally major shopping centres such as Meadowhall and Ealing Broadway.
The stock offers a forecast yield of 4.5% for the current year, and trades at an attractive discount to book value. I’d rate British Land as a long-term income buy.