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A real estate investment trust (REIT) is structured so that the company can receive certain tax breaks if the vast majority of its profits are paid out to shareholders. As a result, the trust can make for great dividend shares. Yet if an investor can find a stock with good income and is also undervalued, it could be the best of both worlds. Here’s one I’ve spotted.
Property around the UK
I’m referring to the Custodian Property Income REIT (LSE:CREI). Over the past year, the share price is flat, with the dividend yield currently at 7.4%. It generates rental income from a diversified portfolio of assets. It typically invests in a variety of smaller, regional UK commercial properties like offices and industrial units.
The properties are let to a wide variety of tenants. Unlike some other REITs that just deal with a few large end users, in this case, there’s no single tenant or property that accounts for a large share of the total rent roll. I like this because it reduces concentration and tenant-default risk.
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Let’s talk about dividends
Back in June, the latest financials showed the current dividend per share was fully covered by earnings. This is a good sign, because if it wasn’t covered, then I’d be worried about the sustainability. Yet if the company keeps paying out dividends (that have increased over the past few years) in line with earnings, it bodes well for the long term.
The diversified mix of properties and tenants means cash flow is less dependent on any single lease or sector. This reduces the risk of a large income disruption. Further, the company has fairly conservative levels of debt financing. So even if interest rates stay higher for longer next year, there’s limited risk related to any debt refinancing. In turn, this supports stable cash flow to fund dividends.
Potentially undervalued
With a REIT, the share price should trade closely to the net asset value (NAV) of the property portfolio. However, this isn’t always the case. Right now, the stock trades at an 18% discount to the last recorded NAV figure from late June. Of course, we’ll have to wait for a more up-to-date figure before jumping to conclusions. That’s why I refer to it as potentially being undervalued to that extent. Yet if this figure is still accurate, I’d expect the share price to rise over time. As a result, the discount would be smaller.
In terms of risks, we could see an economic slowdown in the UK next year due to recent tax changes. In this case, it could negatively impact the REIT. Income growth could stall if the ability to re-let vacant space or increase rents via rent reviews weakens due to the weaker economy.
Even with this concern, I think it’s a good stock for investors to consider for both income and potential share price growth.
