With a 15.1% discount and 8.7% yield, is this penny stock worth considering for growth and passive income?
For those of us looking to earn extra passive income, I reckon a stock yielding 8.7% probably warrants further investigation. And if there was one that also had a market cap less than the value of its assets, Iâd definitely want to find our more.
Alternative Income REIT (LSE:AIRE) is one such stock. It invests in UK properties in alternative and specialist sectors â including hotels, health clubs, hotels, and car showrooms â with a view to providing âsecure and predictable income returnsâ.
As a real estate investment trust (REIT), itâs required to return at least 90% of its property rental profit to shareholders by way of dividends each year. Generally speaking, this makes REITs good for income. However, 90% of nothing isnât worth anything so there are no guarantees that high yields can be maintained.
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For the year ended 30 June 2025 (FY25), the trust paid dividends of 6.2p. In cash terms, this is a 20.6% improvement on FY21. A near-9% yield puts the stock comfortably in the top 10% of UK-listed companies.
And to help provide some assurance that its future income stream is going to be reliable, it has a weighted average unexpired lease term of 15.6 years. In addition, 95.8% of its contracts contain provisions for inflation-linked upwards-only rent reviews.
That’s not all
But thereâs more. At 30 June, its net assets per share was 83.6p. This represents a 15.1% discount to its current (24 October) share price of 71p.
However, although this suggests the stockâs undervalued, I wouldnât pay too much attention to this. Most REITs that Iâve come across are in a similar position. To expand, their business models usually involve borrowing to buy more properties. This makes them less attractive during periods of high interest rates. But this is a sector-wide problem rather than anything specific to Alternative Income REIT.
The rules of the trust specify that it can only borrow up to a maximum of 40% of the gross asset value (GAV) of its portfolio. At 30 June, its loan to GAV was 36.9%.
However, as positive as its yield and valuation might be, there are risks.
The UK commercial property market can be volatile. A downturn in the domestic economy could result in tenants experiencing financial difficulties. If a company goes bust, the length of its lease and whether it provides for inflationary rent increases is inconsequential. And as a penny stock â its current share price is less than £1 and its market cap is below £100m â it doesnât have the financial firepower to withstand a sustained slump. Also, it only owns 20 assets, so one failure could have a significant impact.
In common with other REITs, the business model of Alternative Income means itâs unlikely to experience rapid share price growth. Although itâs increased 33% since October 2020, the baseline for comparison was when the pandemic was still a thing. Of more relevance, the stockâs currently trading 16% lower than it was in September 2022.
But the whole point of a REIT is that it should be good for dividends. In my opinion, capital growth should be viewed as the icing on the cake. And with a yield of 8.7%, Alternative Income has lots going for it. Thatâs why I think itâs a stock for passive income investors to consider.
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James Beard 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.
