Diverse REIT

As a quick introduction, Custodian is a REIT that focuses on multiple sectors of property across many towns and cities across the UK. These include industrial, commercial, office, and retail properties. The properties it owns and rents out help make it that rental income that is then paid to investors such as myself.

So what’s happening with Custodian shares currently? Well, as I write, they’re trading for 105p. At this time last year, the stock was trading for 94p, which is an 11% increase over a 12-month period.

Risks to note

I believe the biggest threat to any REIT currently is economic volatility and any recession that could occur. This is because when the economy is volatile, rental income, as well as demand for property, could be negatively affected. If this were to happen, Custodian’s performance and returns could be affected.

Next, as with any passive income stock, I must remember that dividends are never guaranteed. They can be cancelled at the discretion of the business at any time. Dividends are usually cut to conserve cash and some of the causes can include financial difficulty, a recession, or a one-off event like a pandemic.

Why I like Custodian shares

So let’s take a look at the bull case then. Firstly, I like that Custodian’s property portfolio is diversified from a sector and geographical perspective. It has different types of income-yielding property in various locations throughout the country. I believe this will support performance and growth — if one location or sector slows, growth in another could offset it.

Next, Custodian shares offer a dividend yield of 6.3% at current levels. This is higher than the FTSE 100 and FTSE 250 averages of 3%-4% and 1.9%, respectively. Furthermore, the shares look decent value for money currently on a price-to-earnings ratio of just four.

Finally, although I understand past performance is not a guarantee of the future, I am buoyed by Custodian’s track record. Looking back, I can see it has recorded consistent revenue for the past four years and profit for the past three years. This level of sustained performance should support consistent returns.

In conclusion, I would add Custodian REIT shares to my holdings currently. I believe they would fit into my portfolio nicely along with the other REITs I own shares in. The dividend yield on offer, cheap share price, and the diverse nature of its operations help build my investment case.

The UK market offers a choice of REITs, including healthcare, industrial, office and retail specialists. Here, I want to highlight three REITs with yields over 5% that I think are among the best buys today.

A top FTSE 100 REIT

A REIT is a legal structure that’s taxed differently from a company. In short, REITs get certain tax breaks so long as they return 90% of their rental profits to shareholders in the form of dividends.

One of the largest UK REITs is FTSE 100 member Landsec (LSE: LAND). This £5.6bn firm owns some of London’s most valuable office blocks, as well as a portfolio of major shopping centres, retail parks, hotels and leisure sites.

Of course, we still don’t know for sure whether office and retail demand will return to pre-pandemic levels. That’s a risk here. But, in my view, the quality and location of Landsec’s assets means they’re likely to remain popular.

On balance, I’m attracted to Landsec’s property portfolio and its forecast dividend yield of 5.1%.

A healthcare opportunity?

One sector of the market that shouldn’t be affected by working from home or internet shopping is healthcare. My choice in this area is Target Healthcare REIT (LSE: THRL), a £700m firm which owns a portfolio of long-lease UK care homes.

At the end of December, Target’s averaged unexpired lease length was 27.5 years. This should guarantee predictable rental income for many years. With Target shares offering a 6% dividend yield, this portfolio looks attractive to me.

However, it’s worth remembering that a long lease doesn’t provide any protection against tenants who suffer financial problems. Too many bankruptcies could put pressure on care home rental rates. I don’t know how likely this is, but I do believe it’s a risk.

Fortunately, the UK’s ageing population means demand for care home beds is likely to remain strong. Target estimates that the number of over 85s in the UK will double by 2040.

By focusing on purpose-built homes with wet rooms and good facilities, Target hopes to operate at the quality end of the market, attracting financially secure tenants. I think this REIT is likely to be a long-term winner in this sector.

A regional UK REIT

My final choice is Custodian REIT (LSE: CREI). This REIT is a little different from my other two picks because it owns a mixed portfolio of property in towns and cities all over the UK.

Custodian’s portfolio includes offices, shops, industrial units and warehouses. For me, this is a UK REIT that provides direct exposure to the real UK economy. The obvious risk here is that I’d expect some of Custodian’s tenants to suffer in a recession, perhaps more than at Landsec.

I’m comfortable accepting this risk, partly because Custodian REIT has a loan-to-value ratio of less than 20% — lower than average. I think this would provide some breathing room in a difficult market.

In the meantime, I think Custodian REIT’s 5.5% dividend yield looks very attractive. I’d buy this UK REIT for my portfolio at current levels.

Real estate got hammered by the pandemic. But with the world finally opening up again, I think there’s cash to be made investing here.

UK REIT number one

AEW UK REIT (LSE:AEWU) invests in freehold and leasehold commercial properties across the UK. They include offices, high street retail properties, and industrial warehouses.

Now, you might be thinking that offices and retail are a dying breed. Not quite, in my estimation. While brick and mortar retail has lost market share to online, people still want physical stores. And while offices aren’t the draw they used to be with more working from home, not every company is going fully remote just yet.  

“I expect we will see three or four days a week in the office as the UK recovers,” says Paul Swinney, director of research at the Centre for Cities thinktank.

There is one downside to note for this UK REIT. Full-year 2021 earnings are expected to fall to £16m, before climbing back up to £16.8m in 2022. So the share price could take a hit in the near term.

But the dividend yield AEW plans to pay over those two years will jump from 6.93% in 2020 up to a whopping 8.53%. That’s some serious cash returned to shareholders. Of course, dividends are never guaranteed. Earnings per share are expected to lift from 2.4p per share in 2020 to 6.19p in 2021, and 7.31p in 2022.

A forward price-t0-earnings ratio of 12.5 makes AEW UK REIT cheap, for me. And we heard on 15 June 2021 it won a court battle to recover £1.2m in unpaid rent. I’d buy it now for the dividends alone.

Custody battle

The second UK REIT I’d buy today for big income is Custodian REIT (LSE: CREI). Again, the figures stack up nicely for some serious future dividend yield.

A forward P/E of 15 is about average. However, I’m looking at this UK REIT for its expected 180% earnings per share growth next year. It also has a conservative net gearing at 32%, so I know it’s not overly indebted.

Today’s yield is decent enough at 3.66%. But 2022 dividends are slated to come in at 5.69%, climbing to over 6% the following year. Net profit is forecast to recover strongly from just over £2m in FY2021 to £28m in FY2022. The numbers also show that investment giant Blackrock increased its holding in May 2021.

There’s risk here, of course. Operating margins have been thinned out in recent years. And there’s obvious risk that Custodian REIT might not meet its ambitious targets for profit growth. That would hurt my investment badly.

However, I think this UK REIT is a bargain now based on what’s to come. And I do like laying down cash today, and waiting for every other investor to reach the same decision. I get my dividends, and I may get capital gains from share price appreciation, too.

Over the past three years, Segro has smashed the performance of the FTSE 100 returning 17.5% per annum compared to the FTSE 100’s 5.4% annualised. I reckon this market-beating performance could continue as Segro continues to expand its business empire. 

Single-focus

It owns and operates modern warehouses. In total, the group owns 68m square feet of space, valued at over £8bn. Unlike other real estate investment trusts, which have recently come under pressure due to their exposure to the commercial property market, its warehouse portfolio means that it is well positioned for the e-commerce age. Demand for big-box warehouses is only increasing as retailers invest in their out-of-town infrastructure, as evidenced by the 9.5% increase in Segro’s rent roll for the nine months to the end of September. 

As well as rent roll growth, it has 891,000m square feet of space in its development portfolio. A staggering 71% of this potential floor space has already been let, and in total, management expects to be able to achieve rent of £46m per annum on new space — an estimated net rental yield of 7%. 

The one downside I see here is Segro’s valuation. At 615p per share, the stock is currently changing hands at a small 2% premium to its last reported net asset value. The dividend yield is also a less than impressive 2.8%. Still, I think it’s worth paying a premium for the shares considering Segro’s development pipeline, which should drive net asset value growth in the years ahead. And while today’s dividend yield of 2.8%, might not set pulses racing, analysts expect steady payout growth in the years ahead as new developments are commissioned. 

Rapid growth 

If you’re looking for a stock with a bit more of a yield kick, then Custodian REIT (LSE: CREI) might be for you. While Segro is seeking to invest in modern warehouses, Custodian owns a more diversified property portfolio spread across the UK. These assets are smaller than those of Segro, with an average price, according to the firm’s annual report, of less than £10m. 

Today, Custodian announced that it has completed a deal to acquire “a high street unit on The Grove in Stratford, East London.” This is a great example of the types of property Custodian is looking to buy. Spread across two floors, it has two primary tenants and generates an annual general income of £150,935 for a net initial yield of 6.78%. 

In my view, high street commercial units are a less attractive investment compared to big-box warehouses, especially considering where the world of retail is heading. However, high street assets do offer higher yields as evidenced by Custodian’s current dividend yield of 5.5%. According to my figures, like Segro, Custodian also trades at a slight premium to net asset value. 

Overall, if you’re looking for income, and are willing to take on a bit more risk by investing in commercial property, Custodian could be a great addition to your portfolio. 

Hostelworld Group (LSE: HSW) is a relatively unknown company which certainly deserves more attention. The online hostel booking platform is a game changer in the budget accommodation sector as it directly focuses on the low-cost budget accommodation sector that appeals to younger customers.

Millennials often look for more affordable accommodation as they tend to have less money to spend and have longer holiday stays than their predecessors. This has been driving up demand for hostel rooms, which are becoming increasingly popular alternatives to traditional hotels.

Recent trading conditions have been difficult though. The sector has been facing a number of headwinds following terror attacks in Europe last year, as well as macroeconomic uncertainties and currency fluctuations following the Brexit vote. Still, Hostelworld reported an 18% rise in bookings during the second half of 2016, with the company continuing to generate robust free cash flow.

Leading fund manager Neil Woodford has built up a sizeable stake in the company, with a shareholding of more than 22%, underlining his confidence in the company’s long-term prospects. Hostelworld seems well-suited to his Woodford Equity Income fund as the company has in place a generous dividend policy — it plans to pay approximately 70%-80% of its adjusted profits after tax as dividends.

With this in mind, city analysts expect the stock to offer a prospective dividend yield of 5.8% this year, rising to 6% for next year and 6.2% in the following year. What’s more, valuations are attractive, as Hostelworld trades at forward P/E ratio of 12.2, which analysts expect to decline to just 11.7 by 2018.

Regional property

Another stock that seems set to reward its shareholders with healthy dividends is commercial property company Custodian REIT (LSE: CREI).

Following its IPO in 2014, Custodian has been taking advantage of lower property prices outside of London to expand its portfolio size to 130 properties, up from just 48 at the time of the IPO. Unlike most REITs in the sector, it prefers the sub-£10m regional commercial property market which, due to weaker institutional investor demand, has helped it to build a higher-yielding property portfolio.

Most REITs involved in UK commercial property, including big names such as Land Securities and British Land, trade at a discount to net asset value (NAV) of more than 20%. But Custodian REIT has somehow managed to defy this trend, with the shares currently trading at a modest premium of 7%.

And despite Custodian’s premium to NAV, the stock offers a significantly higher dividend yield than most in the sector. It currently yields 5.7%, beating the sector average of less than 4%. City analysts expect the REIT’s prospective dividend yield to rise to 6.1% by 2017 and 6.5% by 2018. In my view this could be the perfect time to buy for rising dividends and long-term growth.