How this discounted FTSE 100 stock turns £20,000 into £1,272 a year in passive income

Passive income has rarely looked so attractive. With the average two-year fixed mortgage creeping up to 5.62%, buy-to-let landlords are doing sums they’d rather not. 

Income investors on the sidelines might ask whether there’s a way to collect rent without the tenant’s calls about the boiler. There is – and it also doesn’t take huge amounts of cash or debt to get started.

REITs: rent without radiator repairs

Real estate investment trusts (REITs) exist to solve that problem. In exchange for holding at least 75% of assets in property and distributing 90% of taxable rental profits, they pay no tax on that income. 

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.

That often results in some high dividend yields. And UK share prices trailing their US counterparts only adds to the attractive headline numbers.

It’s a good deal with a mathematical catch: if a REIT brings in £100m and sends £90m out to investors, there’s only £10m is left. That’s why share prices rarely run away with themselves. 

For income investors however, that’s beside the point. What matters is whether the rent keeps arriving, not whether the share price doubles.

LondonMetric’s numbers

LondonMetric Property (LSE: LMP) fits the brief. The FTSE 100 firm has a £7.6bn portfolio, which is now 53% logistics after last year’s £699m acquisition of Urban Logistics REIT.

The company’s properties span parcel-delivery sheds, grocery-anchored retail parks, healthcare and leisure assets. These are tenants that — for one reason or another – tend to renew rather than move.

A 17-year weighted average unexpired lease time (WAULT) is unusually long by REIT standards. And it’s why the firm has an excellent record of dividend growth.

Occupancy at 98% is a sign of strong demand. On top of this, 108% dividend cover suggests the returns aren’t being funded from ongoing rental income, rather than reserves.

All of this is encouraging. But – as is often the case with REITs – debt is the point that’s worth paying attention to.

The debt situation

LondonMetric’s loan-to-value (LTV) ratio of 36.7% is unusually high by the company’s standards. That’s partly the result of the recent acquisition. 

Being unable to retain earnings means REITs often have to grow through debt-financed acquisitions. By itself, that’s not a problem, but it requires careful attention from management.

With 99.8% of the company’s existing borrowings hedged at 4%, refinancing risk is limited but real. The thing to keep an eye on is the duration of those loans. 

Long WAULTs mean debts will mature before loans are due for renegotiation. So what happens when it’s time to refinance is the thing to watch – and it’s exactly what management is paid for.

The case

REITs don’t ask investors for a deposit, a mortgage application, or a call about a leaking roof. LondonMetric offers a 6.36% yield, enough to turn £20,000 into £1,272 a year.

While dividends are never guaranteed, this one’s well-covered, at a modest discount to its own net asset value. For investors chasing durable passive income without the debt or the DIY, it’s a name worth the diligence.

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Stephen Wright does not own shares in any of the companies mentioned.