The promise of steady, passive income is highly appealing, particularly when it comes from relatively stable sources like property. Among the various ways to earn such income, Real Estate Investment Trusts (REITs) are increasingly popular, thanks to their substantial dividend yields and hands-off approach to property investment. One such entity catching the eyes of a Motley Fool writer is the Supermarket Income REIT, which boasts a compelling dividend yield and a simple business strategy.
A Closer Look at the REIT’s Operations
The Supermarket Income REIT operates on a straightforward business model: purchasing properties and leasing them to supermarkets. Presently, it holds 73 stores across the UK and France. Its focus is on generating revenue through these leases, which in turn funds the dividends paid out to shareholders.
For the fiscal year ending June 30, 2024 (FY24), the trust is poised to distribute a dividend of 6.06p per share. Considering the current share price of approximately 74p, this equates to an attractive yield of about 8%. This high yield positions the Supermarket Income REIT as a potentially lucrative option for those seeking passive income.
Financial Insights and Future Prospects
Despite its lucrative yield, the REIT’s performance is not without financial intricacies. The necessity to finance further supermarket acquisitions through borrowing introduces a sensitivity to interest rate fluctuations. An increase in borrowing costs could pinch, but fortunately, it’s unlikely to affect the dividend payments directly. This is because REITs, by regulation, must distribute at least 90% of their profits as dividends to enjoy exemption from corporation tax.
Looking ahead, analysts forecast earnings per share (EPS) to slightly increase from 6.05p in FY24 to 6.23p by FY26, with the trust expected to maintain its dividend payouts at 98% of these earnings. These projections suggest not only a stable income stream but slight growth over time.
Evaluating the Risks
No investment is without risk, and the Supermarket Income REIT has its share. Since its inception in 2017, the trust has invested £1.9 billion into property acquisitions, with a subsequent write-down of £235 million on these assets. These write-downs reflect changes in the valuation of its property portfolio and don’t impact the rental income, which is secured by leases. However, they do affect the trust’s balance sheet and could potentially limit future borrowing capacity amid a volatile commercial property market.
The REIT’s share price has seen a decline of over 25% since June 2019, possibly due to these asset write-downs and broader market conditions. Yet, the business model remains robust against the backdrop of evolving retail dynamics, including the growth of online shopping.
The Investment Case
The trust’s loan-to-value ratio stood at a healthy 33% as of December 31, 2023, indicating substantial borrowing capacity for future expansion. This is further supported by the growing trend of sale and leaseback transactions, where supermarkets sell their properties and lease them back, providing a clear path for portfolio growth.