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I think real estate investment trusts (REITs) are a great way to get a second income in the UK housing market. For those of us who can't afford to buy a lot of real estate, REITs provide exposure to the market at a low cost.
REITs attract income by owning and leasing properties in a variety of sectors, including residential, commercial and industrial. A few good examples include Land Securities Group, Get the team together again Basic Health Structures.
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Today, I'm looking at a little-known REIT in FTSE 250 recently given a buy rating by Goldman Sachs.
Supermarket Income REIT (LSE: SUPR) has a portfolio of 73 shopping malls across the UK and France, holding big names such as Tesco, Places to stay in Sainsbury, Marks & Spencer again Carrefour. It has an average unexpired lease term (WAULT) of 12 years, which means that is the average time left on its lease.
With a market-cap of £935m, it is a relatively small REIT FTSE 100 his colleagues. And it's currently unprofitable, taking a £65.8m write-down in its latest earnings report.
However, based on analyst forecasts, there appears to be promising growth potential. Analysts are predicting that earnings per share (EPS) will grow at a rate of 75% annually going forward – almost double the industry average of 39%. If accurate, they should return to profitability by early 2025.
Attractive benefits
Despite the fall in earnings, the company continues to pay good dividends. From 2018, dividend payments are gradually increasing, from 5.63p per share to 6.06p.
With no signs of a reduction on the horizon, an 8% yield would make the stock a great secondary gainer. For example, a £10,000 investment can grow to around £26,500 over 10 years with reinvested dividends. That money will pay around £2,000 in annual dividends.
Over 20 years, dividend payments will be more than £5,000 a year if yields are maintained. Naturally, any increase in the stock price will increase this figure further.
Accidents
The property market is very sensitive to economic changes and Supermarket Income REIT will feel the effects of this in 2022 and 2023. As inflation rises and the economy slows, the stock price has fallen 47.4% over the past 12 months.
There is no guarantee that the current recovery will continue, so stocks may move further if the economy goes south. Currently, its debt position is manageable with a debt-to-equity ratio of 0.62. If that goes up further, it could be a problem. So the stock appears to be more dependent on the current economic recovery than other stocks.
Should I buy the stock?
There are many things I like about the stock. With an 8% yield at today's prices, it is significantly higher than the 3.5% average for FTSE 100 stocks.
And with a portfolio consisting of several UK supermarket chains, it should deliver reliable income for the foreseeable future. But it also has risks associated with the current volatile economic environment.
Ultimately, I think a higher-than-average dividend yield combined with decent growth potential offers a good opportunity. That puts it firmly on my list of stocks to buy next month for my income-oriented portfolio.
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