US equity fund pairings for bull and bear markets

10 September 2024

Fund selectors pair up offensive and defensive managers investing in the US.

Emma Wallis

News editor, Trustnet

  

The US equity market has grown increasingly volatile, especially in the past couple of months. Questions have been raised over the likelihood of a recession and whether the ‘Magnificent Seven’ US stocks are coming off the boil, while the forthcoming presidential election augurs badly for investors who prefer certainty.

Yet the US has been the strongest regional equity market over the past decade, presenting investors with a conundrum: how can they hedge against downside risk without missing out on further potential gains?

One solution would be to choose a combination of strategies, pairing a defensively positioned fund with a growth-seeking strategy. To that end, Trustnet asked fund selectors to suggest pairs of US equity funds that complement each other and thrive in different market environments.

AB American Growth and Dodge & Cox US Stock

Invesco’s model portfolio service owns AB American Growth and the Dodge & Cox US Stock fund, said co-manager David Aujla. The former is a large-cap growth fund with significant positions in technology and durable growth companies, while the latter is a large-cap, value-oriented fund with “greater exposure to companies that could be described as more economically sensitive,” he said.

“Together this fund pair provides the portfolio with the potential ability to participate in US equity market performance whether it be a more momentum-led market or a valuation-led market. And we hope that over time the experience should be smoother as a result.”

Performance of funds over 5yrs

Source: FE Analytics

Alliance Bernstein Sustainable US and Neuberger Berman US Large Cap Value

Schroder Investment Solutions has changed its line-up of US funds to make its portfolios more conservative, adding funds that own attractively valued companies with good fundamentals.

Portfolio manager Rob Starkey said Schroders used Dodge & Cox as its US value manager until October 2022 but switched to NB US Large Cap Value, which has larger allocations to defensive sectors such as consumer staples.

“The intention was to allocate capital to a manager that would vary its exposure to higher quality stocks depending on the environment,” he explained. Schroders’ model portfolios now have “a value tilt in the American allocation to reflect the risk/reward opportunity set”.

On the growth side, Schroders rotated out of Brown Advisory US Sustainable

Growth into AllianceBernstein Sustainable US in the first quarter of last year.

“Brown Advisory, despite having similar metrics at the time in terms of quality long-term earnings growth, was a much higher valued strategy, so we wanted to shift to something that had less of a valuation risk while keeping those overall growth and quality metrics,” Starkey explained.

Performance of funds since NB US Large Cap Value’s inception

Source: FE Analytics

First Eagle US Small Cap Opportunity, Spyglass US Growth and Snyder US All Cap Equity

Downing has paired up two aggressive funds whose investment styles offset each other: First Eagle US Small Cap Opportunity and Spyglass US Growth.

Fund manager Simon Evan-Cook said these two strategies “might well be the most aggressive funds in the sector”.

Most US small-cap funds buy companies that would be considered mid-caps if they were listed in the UK, but First Eagle’s Bill Hench invests in minnows that would be considered small-caps on this side of the Atlantic as well.

“He is a proper deep value manager”, said Evan-Cook. Hench’s philosophy is that if 10% of his holdings don’t go bust in any given year, “he’s probably not taking enough risk”. On the flip side, three out of every 10 investments will probably multiply tenfold.

The fund is highly diversified and geared into the US economic cycle so if the economy performs well it should deliver outsized returns, Evan-Cook explained.

Jim Robillard, chief investment officer of Spyglass Capital Management in San Francisco, operates at the other extreme of the style spectrum. He is looking for small and mid-cap growth companies that are “in the right place at the right time with the right tech to become five times bigger over the next five years”, Evan-Cook said. Robillard is “valuation aware”, unlike some high-growth investors.

With fewer assets under management, Spyglass can invest in small, growing companies, while its proximity to San Francisco close to many start-ups is also advantageous.

Performance of funds since First Eagle US Small Cap Opportunity’s inception

Source: FE Analytics

For a more conservative play, Evan-Cook highlighted Snyder US All Cap Equity. It invests in the highest quality companies in the US with strong competitive advantages, balance sheets, brands and management teams, but the firm also has a tight valuation discipline.

Evan-Cook compared the strategy to a Venn diagram with two circles encompassing the best companies and the cheapest companies in the US. Snyder is “trying to find that tiny little spot where the two circles cross over,” he said.

GQG Partners US Equity and Invesco FTSE RAFI US 1000 UCITS ETF

GQG Partners US Equity is a best ideas portfolio of 28 stocks managed by three FE fundinfo Alpha Managers – Rajiv Jain, Brian Kersmanc and Sudarshan Murthy – and it features on Bestinvest’s Best Funds List.

Jason Hollands, managing director of Bestinvest, said: “The approach is highly flexible and the managers do not shy away from making significant calls, which means relatively high turnover.

“For example, the managers significantly reduced tech exposure in May 2023. Part of their research approach is to use people with backgrounds in investigative journalism, which had helped them notice that job openings in tech were slowing, which they saw as a warning sign.”

Although he picked this fund for investors who are bullish on US equities, “the managers are very focused on downside protection,” he pointed out.

By contrast, the Invesco FTSE RAFI US 1000 UCITS ETF might suit investors worried about “frothy tech valuations” who want to diversify away from the S&P 500.

This exchange-traded fund (ETF) differs from market capitalisation-weighted trackers because it allocates to the 1,000 largest US stocks based on four fundamental factors: sales, cash flow, book value and average total dividends over five years.

“The outcome is broad exposure to the US market but with a tilt towards companies with attractive valuations and lower exposure to more speculative businesses,” Hollands explained.

In 2021, when the NASDAQ index plunged 24% and the S&P 500 was down 7.8%, the fund eked out a 1.8% return.

Performance of funds since GQG Partners US Equity’s inception

Source: FE Analytics

Shore Capital Markets lifts Regional REIT to ‘hold’ from ‘sell’

GOLDMAN CUTS SUPERMARKET INCOME REIT PRICE TARGET TO 87 (91) PENCE – ‘BUY’

but as always best to DYOR

Watch List

Discount Watch

The discounts of nine investment companies hit 52-week highs last week, but which region contributed the most to the list?

Frank Buhagiar•09 Sep

We estimate there to be nine investment companies that saw their share prices trade at 52-week high discounts over the course of the week ended Friday 6 September 2024 – four more than the previous week’s five.

Four of this week’s nine appeared on the list last week: JPEL Private Equity from private equity; Ceiba Investments from property; Gore Street Energy Storage (GSF) from renewables; and Schroder Capital Global Innovation (INOV) from growth capital.

That leaves five new names, three of which come from one region: Japan. The funds in question – Fidelity Japan (FJV), JPMorgan Japanese (JFJ) and Schroder Japan (SJG). None of the three put out results but all were busy buying back their own shares during the week. The Japanese market found the going hard over the course of the week ended 6 September. The Nikkei 225 was off 5.8% while the broader TOPIX Index finished down 4.2%. A sell-off in semiconductor stocks in sympathy with the U.S.; a strengthening in the yen which makes life trickier for exporters; and concerns over further interest rate hikes – all weighing on sentiment. Just goes to show, sometimes you just can’t buck the market.

Or can you? Life Sciences REIT (LABS) certainly doing a good job of it, not in a good way though. For the share price has been bumping along the bottom of its 12-month discount range for some time, finally setting a new high (or low depending on your perspective) on 4 September 2024. This, however, is in stark contrast to the rest of the property sector (with the exception of Discount Watch regular CBA). For property sector share prices have, for the most part, bounced off their lows in anticipation of lower interest rates and in response to an uptick in corporate activity. And yet, LABS has failed to join in on the party. No news out this past week but on 12 August the company did announce that the latest half-year results are due to be published on 26 September 2024 – does the market know something the rest of us don’t?

The 52-week high discounters

Fund Discount Sector

Ceiba Investments CBA-69.64%

PropertyLife Science REIT LABS-59.99%Property

Schroders Capital Global Innovation INOV-53.63%

Growth Capital JPEL Private Equity JPEL-46.96%Private Equity Gore Street Energy Storage GSF-45.72%Renewables

The full list

Fund Discount Sector Schroders Capital Global Innovation INOV53.63%Growth Capital Fidelity Japan FJV15.12%

Japan JPMorgan Japanese JFJ13.26%JapanSchroder

Japan SJG14.95%Japan

JPEL Private Equity JPEL46.96%Private Equity Ceiba Investments CBA69.64%

PropertyLife Science REIT LABS59.99% Property

Gore Street Energy Storage GSF45.72%Renewables

Vietnam Enterprise VEIL23.09%Vietnam

Weekly Gainers

A new leader atop Winterflood’s list of highest monthly movers in the investment company space. But which fund’s appearance in the top five could well be down to it being viewed as something of a safe haven?

Frank Buhagiar•09 Sep

The Top Five

Doric Nimrod Air 3 (DNA3) soars to the top of Winterflood’s list of highest monthly movers in the investment company space after seeing its share price gain on the month increase to +16.7% from +14.8% previously. Last month’s news that sister fund Doric Nimrod Air 2 (DNA2) is selling its remaining five Airbus A380-861 aircraft to Emirates for more than expected still working its magic on DNA3’s share price. DNA2 too saw its monthly gain increase to +15.8% from +14.6%, enough to secure second place on the list. The two aircraft leasing funds still flying in tight formation then.

PRS REIT (PRSR) slips down to third. Shares up +15.1% on the month but that’s down on last week’s +18.2%. Where to begin with this one? At the beginning. 29 August 2024, the build-to-rent REIT announced it had received a letter from shareholders accounting for 17.3% of the company. The letter calls for a general meeting to be held at which shareholders can vote to replace two of the five existing independent Non-executive Directors, including Chairman, Stephen Smith, with Robert Naylor and Christopher Mills. At the time Winterflood noted “the requisitioning shareholders have particular concerns regarding the management contract extensions announced in July. The inability to terminate the manager until 2029 is considered problematic from a governance perspective.”

2 September 2024, PRSR issues a much longer press release. Key points include Rothschild appointed as a third advisor; formation of a Board sub-committee comprising the three directors not subject to calls to be replaced to engage with the requisitioning group; a defence of the discount at which the shares trade by referencing other REITs sitting on large discounts too; and a promise that further actions/considerations will be communicated with the results in early October.

The above prompted requisitioning shareholders Harwood Capital and CCLA to publish letters setting out their positions. These include concerns over the extra expense of appointing a third adviser, the Board’s inaction in tackling the discount and the lack of shareholder consultation ahead of the management contract extensions which the shareholders believe are a poison pill for any would be acquirer. As noted last week, all the hallmarks of a long-running saga here.

Balanced Commercial Property Trust (BCPT) came from nowhere to take fourth spot after announcing it has agreed to be acquired by private investment firm Starwood Capital Group in a recommended cash offer of 96p per BCPT share. That’s a 21.5% premium to the undisturbed share price of 79p and an 8.7% discount to BCPT’s last reported unaudited NAV per share of 105.1p as at 30 June 2024. News was good for a spike in the share price so that the shares are now up +12.7% on the month. With shareholders accounting for 25.83% of BCPT’s issued ordinary share capital backing the Starwood bid, seems less chance here of a long-running saga.

Majedie Investments (MAJE) completes the top five thanks to a +12.3% share price increase. No news out from the flexible investor this past week or so, but a look at the graph shows the share price started its move higher roundabout 30 August. That’s the same date equity markets embarked on their latest wobble – the start of the S&P 500 and Nasdaq’s move downwards can be traced back to 30 August exactly. What’s more, the spike in MAJE’s share price coincides with an uptick in trading volumes, suggesting investors may well view the fund as a safe haven.

Scottish Mortgage

Scottish Mortgage’s (SMT) share price finished the week ended Friday 6 September 2024 with a monthly loss of -2.5%, an improvement on the -4.2% deficit seen seven days earlier. NAV improved too, down -0.5% compared to -4.3% previously. The wider global sector finished the week flat on the month, it had been nursing a -1.5% loss. Once again, SMT, been busy buying back its own shares but this week, Non-executive Director Sharon Flood joined in on the act, acquiring £20,000 worth of stock. Combination of the company and Director buys, enough for a positive week for the shares it seems.

Regional REIT Limited

(“Regional REIT”, the “Group” or the “Company”)

2024 Half Year Results, Q2 Dividend Declaration

& £110.5m Fundraise Successfully Completed Post Period End

Regional REIT (LSE: RGL), the regional commercial property specialist today announces its half year results for the six months ended 30 June 2024.

Post-Period end highlights, Transformational Successful Fundraise:

·      18 July 2024 successfully completed £110.5m equity fund raise, supported by Shareholders

·    Proceeds used for the repayment of the £50m retail bond and £26.3m will be used to reduce bank facilities. The remaining net proceeds of £28.4m will be used in accretive capital expenditure projects on assets, enhancing earnings in the near term and value in the mid to long-term, further underpinning dividend payments going forward

·      29 July 2024 1 for every 10 ordinary share consolidation completed

·      6 August 2024 repaid in full the 4.50%, £50m retail bond

·      LTV reduced to 42.2% from 30 June 2024 58.3%

Financial Highlights:

·     Portfolio valuation of £647.9m (31 December 2023: £700.7m). On a like-for-like basis, the portfolio value reduced by 5.1% during the period, after adjusting for disposals and capital expenditure, comparing favourably against the MSCI Rest of UK offices Index return of -6.4%

·      Rent collection remained strong over the period at 98.0% (equivalent period for 30 June 2023: 98.8%).

·      Rent roll at £63.5m, 3% lower on a like-for-like basis (31 December 2023: £67.8m)

·      Net initial yield on the portfolio 6.1% (31 December 2023: 6.2%)

·      Covered dividend declared per share of Q1 2024 1.20 pence per share (“pps”); following the successful equity capital raise and 1 for 10 share consolidation the dividend for Q2 2024: 2.20pps (30 June 2023: 2.85pps)

·      The fully covered dividend target for 2024 for H2 2024 is 4.4pps

·      The Group’s weighted average cost of debt continued to remain low at 3.5% (31 December 2023: 3.5%)

·      Operating profit before gains and losses on property assets and other investments for the six months ending 30 June 2024 amounted to £19.1m (30 June 2023: £20.6m)

·      The weighted average maturity of the bank debt was 3.0 years (31 December 2023: 3.5 years)

·      EPRA NTA 48.8pps (31 December 2023: 56.4pps); IFRS NAV of 51.7pps (31 December 2023: 59.3pps)

·      Prior to the 1 for 10 share consolidation on 29 July 2024: EPRA EPS of 2.1pps for the period (30 June 2023: 2.5pps); and post share consolidation 21.3p (30 June 2023: 24.6p)

Operational highlights:

·      As at 30 June 2024, 81.8% of portfolio properties had attained an EPC rating of C+ or higher, an improvement from 73.7% as recorded on 31 December 2023. Properties rated B+ and Exempt have surged to 56.3%, up from 42.1% at the end of the previous year. These milestones place us firmly on the path to better the Minimum Energy Efficiency Standard (MEES) target of an EPC rating of B well before the 2030 deadline

·      The Group made disposals amounting to £21.9m (before costs) during the period

·     At period end, 91.5% (31 December 2023 92.1%) of the portfolio by valuation was offices, 3.4% industrial (31 December 2023: 3.2%), 3.1% retail (31 December 2023 3.1%) and 1.9% other (31 December 2023: 1.7%)

·     At the period end, the portfolio valuation split by region was as follows: England 77.5% (31 December 2023: 78.4%), 16.7% Scotland (31 December 2023: 16.2%) and 5.8% Wales (31 December 2023: 5.4%).

·      By income, office assets accounted for 90.9% of gross rental income (30 June 2023: 91.4%) and 4.3% was retail (30 June 2023: 4.6%). The remaining balance was made up of industrial, 3.0% (30 June 2023: 2.7%) and other, 1.8% (30 June 2023: 1.4%)

·     The portfolio continues to remain diversified with 132 properties (31 December 2023: 144), 1,305 units (31 December 2023: 1,483) and 832 tenants (31 December 2023: 978)

·      EPRA Occupancy rate stood at 78.0% (31 December 2023: 80.0%)

Q2 2024 Dividend Declaration

The Company declares that it will pay a dividend of 2.20 pps for the period 1 April 2024 to 30 June 2024. The entire dividend will be paid as a REIT property income distribution (“PID”).

Shareholders have the option to invest their dividend in a Dividend Reinvestment Plan (“DRIP”), and more details can be found on the Company’s website.

The key dates relating to this dividend are:

Ex-dividend date	19 September 2024
Record date	20 September 2024
Last day for DRIP election	27 September 2024
Payment date	18 October 2024

The level of future payments of dividends will be determined by the Board having regard to, among other factors, the financial position and performance of the Group at the relevant time, UK REIT requirements, the interest of shareholders and the long term future of the Company.

Stephen Inglis, CEO of London and Scottish Property Investment Management, the Asset Manager:

“The period under review was another challenging period for the commercial real estate sector, with valuations reduced by persistently high interest rates and poor investor sentiment towards UK commercial real estate. However, the regional office market appears to be reaching an inflection point, with the recent cut to the base rate providing a helpful development.

“Post-period end, we repaid in full our 4.50% £50m retail bond, which we were able to achieve following a £110.5m capital raise in July. This also provides us with the opportunity to reduce the Company’s borrowings with the LTV reducing to 42% and we continue to make efforts to reduce the LTV further to the long term target of 40%. The raise also provides greater flexibility for capital expenditure to improve the core assets in our portfolio and increase shareholder value going forward.

“We would again like to thank shareholders for their continued support during this challenging period and we look forward to updating them on our progress in enhancing shareholder value through active portfolio management.”

Subsequent Events summary post 30 June 2024

Since the quarter end, the Group has successfully completed an additional notable letting:

Lettings

·    The Courtyard, Macclesfield – Elior UK Services Ltd. has renewed existing lease for 23,100 sq. ft. of space to August 2028, at a rental income of £542,700 pa (£23.49/ sq. ft.)

·      1175 Century Way, Thorpe Park, Leeds – Greenbelt Group Ltd. has let 2,670 sq. ft. of office space to July 2029, at a rental income of £64,080 pa (£24.00 / sq. ft.).

·      Mandale Business Park, Durham – Avove Ltd. has let 5,000 sq. ft. of office space to July 2034 with the option to break in 2029, at a rental income of £58,750 pa (£11.75 / sq. ft.).

·     St James Business Park, Paisley – Maximus UK Services Ltd. has let 5,456 sq. ft. of office space to September 2029 with the option to break in 2025, at a rental income of £76,384 pa (£14.00 / sq. ft.).

·     Buchanan Gate, Stepps, Glasgow – RPS Environmental Management Ltd. has let 7,710 sq. ft. of office space to September 2029 with the option to break in 2027, at a rental income of £88,665 pa (£11.50 / sq. ft.).

Future asset disposal programme comprises of 54 sales totalling c £106m:

·      2 disposals contracted for c. £1.5m

·      10 disposals totalling c. £12.4m under offer and in legal due diligence

·      7 further disposals totalling c. £10.4m are in negotiation

·      7 further disposals totalling c. £9.1m are on the market

·      28 potential disposals totalling c. £73m are being prepared for the market

Thursday 12 September

Apax Global Alpha Ltd ex-dividend payment date
Athelney Trust PLC ex-dividend payment date
Globalworth Real Estate Investments Ltd ex-dividend payment date
Henderson High Income Trust PLC ex-dividend payment date
International Public Partnerships Ltd ex-dividend payment date
Pollen Street Group Ltd ex-dividend payment date

Share tips 2024: this week’s top picks

Share tips 2024: MoneyWeek’s roundup of the top picks this week – here’s what the experts think you should buy

(Image credit: Yuichiro Chino)

By Kalpana Fitzpatrick

If you’ve been keeping a close eye on share tips 2024, then don’t miss this weekly round up of the top stocks to consider for your portfolio each week. 

The MoneyWeek share tips 2024 guide pulls together some of the best UK stocks from some of the top share tipsters around.

As well as the UK financial pages, we look at publications across the pond for investors who want to diversify their holdings internationally.

From investing in UK equities, European stocks, to finding the best performing stocks in the S&P 500 – here are our top share tips of the week.

Share tips 2024: top picks of the week

Five to buy

1. Unilever (LON: ULVR)
   The Telegraph
   Unilever’s dividend growth has lagged behind inflation since 2019. But the consumer-goods giant’s prospects are improving, with inflation cooling and interest rates falling in developed economies; growth in emerging markets should also prove a tailwind. Recent first-half results showed growth in sales and operating profit margins. A shift in strategy, including planning to sell the ice cream business, is expected to boost profitability. Unilever offers “good value for money”. 4,912p
2. Nintendo (TYO: 7974)
   The Times
   Nintendo, home to Super Mario Bros. and Donkey Kong, is a giant in the videogame industry. The launch of a new console and sequels to some of its most popular titles next year should bolster the shares. Since Nintendo launched its Switch console in 2017, sales have tripled and the stock has more than quadrupled. The Japanese firm’s success is owed to family-friendly games, digital services, loyal users and powerful intellectual property. ¥8,253
3. Windward (LON: WNWD)
   This is Money
   With shipping becoming more challenging, aim-listed Windward helps companies, ship owners, and governments manage maritime journeys more efficiently by analysing shipping data. Its clients include the US government, Interpol, BP and Glencore. Windward’s new tool, MAI Expert, which uses generative artificial intelligence to assess risks with vessels quickly, is set to drive future growth. “Buy and hold.” 138p
4. Renold (LON: RNO)
   Shares
   Renold is the world’s second-largest maker of industrial chains and specialist torque transmission products. Despite having less than 10% market share, there is room for growth through acquisitions in a fragmented market. Customers are prepared to pay a premium for its products, and Renold is benefiting from increasing automation across industries. The potential for double-digit profit growth and increasing cash generation isn’t reflected in Renold’s “lowly” seven times forward price/earnings (p/e) ratio. 55p
5. Hochschild Mining (LON: HOC)
   Investors’ Chronicle
   Hochschild Mining’s half-year earnings improved thanks to record gold prices, increased production from a new Brazilian gold mine, and closing a costly silver mine. Costs are expected to fall as the new mine hits capacity. The shares are up by 70% this year. They took a knock on the lack of a payout alongside the interims, but Hochschild’s focus on refinancing $300m of debt and hitting free cashflow first “looks sensible”. 174p

One to sell

Starbucks (NASDAQ: SBUX)
The Times
Sales at Starbucks are declining owing to high prices; long waiting times; increased competition in China where younger players are snatching market share; and a social media-driven boycott thanks to the US coffee giant’s position in the Middle East. Investors are pinning their hopes on new CEO Brian Niccol’s impressive record, but the problems at Starbucks seem more complicated than the ones he faced at Chipotle Mexican Grill. Starbucks’ 26.6 times forward earnings ratio and Niccol’s controversial pay package are a steep price for a company with much to prove. “Avoid.” $95

The rest…

Cranswick (LON: CWK)
The Telegraph
FTSE 250-listed Cranswick has “solid fundamentals”, a strong balance sheet, and a solid return on equity. The food producer’s growth strategy makes sense and is set to be turbocharged by lower inflation and expected interest rate cuts. Since July 2022, Cranswick’s shares have gained 55%, outperforming the FTSE 100 and 250. Including dividends, the stock has achieved a 62% total return in just over two years. Investors should “keep buying” it (4,765p).

Melrose Industries (LON: MRO)
The Times
Melrose Industries’ shares dropped by 7% after UBS suggested that the group’s jet-engine business could be worth about half of what its management says. Melrose disputes the report and stands by its calculations. Melrose started as a turnaround specialist but became an aerospace manufacturer after buying GKN in 2018. UBS has downgraded Melrose’s stock to “sell”, arguing that Melrose overestimates the value of revenue and contracts. Melrose’s rising net debt has also prompted concern. Yet recent half-year results beat profit expectations and Melrose has announced a share buyback. Hold (486p).

EDX Medical (EDX.PL)
This is Money
EDX Medical is developing tests for the rapid diagnosis of heart disease and hospital infections such as sepsis and MRSA. The start-up has also devised a blood test for those whose family history suggests they could be vulnerable to cancer. EDX listed in 2022 at 6p. Shares hit 12p this year but are now at 10p, and “at this level, the stock should yield rewards”. With strong partners and billionaire backers, EDX is an “attractive punt for the adventurous investor”. Buy (10p).

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

I’ve booked a ‘profit’ of £400 with SOHO

Current figures for the Trust

Profit £4,741 which includes dividends of £677.33 and

Intra unrealised profit of £1,235.56

The SOHO profit is now in excess of the realised loss with LBOW.

7.4% yield and oversold! Here’s why I’m buying Warehouse REIT shares
Story by Zaven Boyrazian, MSc

Since the start of 2022, shares of Warehouse REIT (LSE:WHR) have been slashed in half, sending its dividend yield surging to 7.4% today. That’s more than double the FTSE 100’s 3.6%, and since management just announced its latest dividend payment, it seems these lucrative payouts are here to stay.

But looking at the latest results, the firm’s share price may also be on the verge of making a comeback. In other words, today’s juicy yield could be a fleeting opportunity for income investors in 2024. Let’s take a closer look.

Investors vs real estate
Real estate has long had a reputation for being a ‘safe’ investment. Yet the recent shake-up in the economy and stock market was an abrupt reminder that this common belief is wildly untrue. With interest rates rising, property values have tumbled, especially in the commercial sector.
In particular, Warehouse REIT’s portfolio of urban logistical warehouses was hit hard. More expensive mortgages paired with lower demand on the back of weak economic conditions saw its asset portfolio shrink in value. Subsequently, fearful investors send the stock plummeting even further.

Yet this downward trajectory appears to have abated. The Bank of England introduced the first interest rate cut last month, reducing pressure on Warehouse REIT’s balance sheet. Meanwhile, management has completed its property disposal programme, which helped refocus the portfolio while simultaneously pouring in some cash to sort out now-expensive loans.

In other words, the firm is in a much stronger financial position than a year ago. And continued on-time rental payments from tenants have enabled dividends to keep flowing despite all the disruption. Obviously, that’s good news, yet the shares still trade at a near-30% discount to net asset value, indicating a buying opportunity that I’m capitalising on.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

A change of strategy?
Weak investor sentiment in the real estate sector can easily explain the high level of pessimism. But it’s not the only factor at play. With the balance sheet back in a sturdy position, Warehouse’s management has begun putting growth back in its crosshairs.

It’s recently executed a £38.6m acquisition of the Ventura Retail Park in Tamworth. It seems the group is capitalising on weak market prices and has locked in a yield of 7.4%. That’s pretty high for such a property. And since it exceeds the group’s cost of debt, it will likely translate into new shareholder value creation as well as higher dividends in the long run.

However, a retail park is a pretty different beast compared to logistical warehouses. This may just be a one-time purchase capitalising on a buying opportunity within the real estate sector. However, suppose management starts buying other non-core properties? In that case, it signals an unannounced and risky change in strategy that would require careful scrutiny.

The bottom line
As interest rates continue to fall, the pressure on Warehouse REIT’s financials, profits, and dividends will steadily alleviate. That will organically provide more flexibility to pursue new growth opportunities, with the proceeds channelling into dividends.

Obviously, there are no guarantees, and until growth is back on track, I’m doubtful that dividends will be hiked further. Nevertheless, the worst appears to be over. And with the shares trading so cheaply, the risk is worth me taking, I believe.

The post 7.4% yield and oversold! Here’s why I’m buying Warehouse REIT shares appeared first on The Motley Fool UK.