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I think dividend investors should look closely at shares in Alternative Income REIT (LSE:AIRE). There’s an 8% yield on offer and the firm’s leases have a very long time to run.
With a market value of just over £50m and shares priced at 73.9p, this is a penny stock. But it could well be worth considering for anyone looking for steady passive income.
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Long-term passive income
Alternative Income REIT owns a portfolio of around 20 properties. These include a retail park in the Midlands, a block of flats in Salford, and a power station near where I grew up.
Most REITs tend to specialise in a particular industry or property type. But having a mix of assets provides some protection against cyclical ups and downs in any given sector.
What they have in common though, is long tenancies. The average time to first break in its leases is 15 years, which should mean a decade and a half of steady rental income.
Leases tend to have inflation-linked increases built in, so there’s protection on that front as well. So the obvious question is what could stop investors getting a stress-free 8% dividend?
Risks
One thing to note is that the Alternative Income REIT’s average debt maturity is around five years. That means it’s much shorter than the average lease expiry.
This creates a duration risk – the firm will almost certainly have to refinance its borrowings well before its leases are up for renewal. And the danger is that interest rates might be higher. In that situation, the company will end up paying more on its debts. But it won’t be able to renegotiate its leases to offset the higher costs for another 10 years or so.
That’s a common risk with REITs in general, but it’s particularly significant in Alternative Income REIT’s case. The longer leases mean the gap’s wider than with most companies.
Valuation
The big question for investors is whether or not the risks are adequately reflected in the share price. And there’s a decent case for thinking they are. The stock currently trades 12% below its net asset value. That arguably means investors are getting a discount in exchange for the potential refinancing risk that comes with the company.
Obviously, that depends on the firm’s assets being valued accurately in the calculation of their value. But with long-term income that looks relatively predictable, this should be the case.
In other words, investors might see an increase in interest payments (or they might not). With an 8% yield though, they should still be set for a very good return even if debt costs go up.
Diversification
I think Alternative Income REIT’s a worthy candidate for dividend investors to consider. Its long leases mean the risk of vacant properties is lower than it is elsewhere in the industry.
That should give it an advantage when it comes to stability, especially in an economic downturn. Anyone seeking to collect an 8% dividend for the next 15 years should take a closer look.
