Real estate investment trusts (REITs) can be great passive income investments. And I think that right now is a great time to be investing in them.
While I usually go hunting for bigger fish, there’s one REIT penny stock that’s caught my eye recently. Shares in Alternative Income REIT (LSE:AIRE) come with a 9% dividend yield that I think is worth a closer look.
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Company overview
Alternative Income — or AIRE as it often styles itself — owns a diversified collection of 18 properties, situated across the UK. The largest concentration, though, is in the West Midlands and the North West.
The firm’s portfolio includes hotels, gyms, and residential accommodation. Around 25% of the company’s rent comes from the industrial sector, with healthcare making up another 17%.
Investing in a company with a portfolio this size is risky. It means that any of its buildings being vacant or tenants not paying is likely to have a significant impact on overall rent collection.
For now though, rent collection metrics have been impressive. And the long-term future looks decent, with the average lease having 17 years until its first break.
The company’s debt is due in two years. I expect the firm to refinance this at a higher rate, but with operating income comfortably covering interest payments, I don’t see this as a problem.
Risks and rewards
A 9% dividend yield can be an attractive opportunity, but it can also be a sign there are significant risks with the stock that investors are taking notice of. So which is it with this one?
Owning a diversified portfolio of assets has its pros and cons. It gives the business a degree of protection from a downturn in any one sector, but it also requires a broad range of expertise from management.
In general, REITs often find growth challenging. The requirement that they have to pay out 90% of their income makes them a great source of passive income, but it also limits their opportunities to expand their asset base.
AIRE has a couple of advantages in this regard though. First, it can look across a wide range of sectors for opportunities, rather than being limited to a particular industry.
Second, the firm’s size means that even small acquisitions can make a meaningful difference to its overall income. So there might be opportunities available away from bigger competitors.
An unusual opportunity
I think the shares look like a really good passive income investment. I suspect the stock is going under the radar of most investors, which is creating an attractive opportunity.
A 9% yield implies that investors aren’t expecting much in the way of growth going forward. But even without significant rent increases, I think the stock could be a good dividend stock to own.
The vast majority of its contracts have inflation increases built in, though. So even without much in the way of acquisition activity, I’d expect to see rental income increasing gradually over time.
This should help offset the effect of higher interest rates when the time comes for the company to refinance its debt. While I don’t usually invest in penny stocks, I might well make an exception here.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
