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Real estate investment trusts (REITs) can be excellent passive income investments. And I think now is a good time to invest in them.
While I normally go out hunting for bigger fish, there is one REIT penny that caught my attention recently. Actions in Alternative Income REITs (LSE:AIRE) offer a 9% dividend yield which I think is worth a closer look.
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Company Overview
Alternative Income, or AIRE as it is often referred to, owns a diversified collection of 18 properties, located across the UK. However, the highest concentration is in the West Midlands and the North West.
The firm’s portfolio includes hotels, gyms and residential accommodation. About 25% of the company’s rent comes from the industrial sector, with the healthcare sector accounting for another 17%.
Investing in a company with a portfolio of this size is risky. It means that any of its buildings that are vacant or tenants are not paying will likely have a significant impact on overall rent collections.
For now, however, 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 matures in two years. I hope the company refinances this at a higher rate, but since operating income comfortably covers 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 that there are significant risks with the stock that investors are taking note of. So what’s the problem with this one?
Owning a diversified portfolio of assets has its advantages and disadvantages. It provides the company with a degree of protection against a crisis in any sector, but it also requires a wide range of knowledge on the part of management.
In general, REITs tend to find it difficult to grow. The requirement that they must 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.
However, AIRE has a couple of advantages in this regard. Firstly, you can look for opportunities across a wide range of sectors, rather than limiting yourself to a particular industry.
Second, the size of the company means that even small acquisitions can make a significant difference to its overall revenue. Therefore, there could be opportunities available away from larger competitors.
An unusual opportunity
I think stocks look like a very good passive income investment. I suspect the stock is flying under the radar of most investors, which is creating an attractive opportunity.
A 9% yield implies that investors don’t expect much growth in the future. But even without significant rent increases, I think the stock could be a good dividend stock.
However, the vast majority of their contracts include inflation increases. So even without much acquisition activity, he would expect to see rental income gradually increase over time.
This should help offset the effect of higher interest rates when it comes time for the company to refinance its debt. While I don’t typically invest in penny stocks, I might as well make an exception here.
