Down 35%, this FTSE 250 income stock looks like a great opportunity

Share on LondonMetric Property (LSE:LMP) has fallen around 35% over the past 12 months. As a result, the 5% dividend yield makes it attractive from a passive income perspective.

The fall in share prices is a result of the decline in the value of the UK property market, especially warehouses. Despite this, the rental income remains strong and I think the stock is a good investment.

What he did

Let’s start with what the company is. These are tax-efficient Real Estate Investment Trusts (REITs) that mean they make money by owning and renting properties to tenants.

Around 75% of LondonMetric Property’s buildings are industrial warehouses and distribution centres. The other 25% are retail properties, mostly grocery stores.

According to the last earnings report, about 99% of the company’s buildings are occupied. Its tenants are very diverse, none accounting for more than 4% of the company’s total rental income.

The stock currently pays a dividend of above 5%, which has been growing at 12% annually for the last decade. I think this makes it something investors looking for passive income should keep an eye on.

Why has the stock price gone down?

In general, business in the company seems good to me. So the obvious question is why have stocks fallen in the past year?

One reason is that interest rates have risen in the UK. That made borrowing costs more expensive, causing demand – and therefore prices – to fall in the UK property market.

And warehouse owners have had it harder than most properties in terms of declining market values. During the last 12 months, the stock in Warehouse REIT has fallen by 42% and secret down 43%.

The biggest reason for this, in my view, is Amazon‘s announcement that it was looking to offload some of its excess warehouse. This is a risk for UK warehouse REITs for two reasons.

First, excess supply in the market creates a headwind for prices. Second, Amazon is one of the largest tenants of UK industrial properties.

The stock looks like a bargain

I think there are several reasons for income investors to look seriously at shares in LondonMetric Property. Whether or not the stock has fallen further, it feels to me like a bargain at today’s prices.

The most obvious reason is that rental income remains strong. As I see it, this is more important to dividend investors than the market value of the company’s assets.

Second, there is a long-term tailwind behind the industry. The steady rise of e-commerce should mean that demand for warehouses remains strong for some time to come.

In addition, industrial distribution centers are difficult to compete with. Space to build new warehouses in prime areas is limited and location is important.

And building a new warehouse is expensive. This means high inflation, including rising costs for materials, creates another barrier to entry for competitors.

A stock to buy

In my view, this is a stock that should be seriously considered by investors looking for passive income. A drop in stock prices looks like an opportunity to me.

I already have heavy REIT exposure in my portfolio. When the new ISA season comes around, I will look carefully at buying my own shares.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor is it, any form of tax advice.