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, I’d 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 – including hotels, health clubs, hotels, and car showrooms – with a view to providing “secure and predictable income returns”.

As a real estate investment trust (REIT), it’s 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 isn’t 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 there’s 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 stock’s undervalued, I wouldn’t pay too much attention to this. Most REITs that I’ve 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 – its current share price is less than £1 and its market cap is below £100m – it doesn’t 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 it’s unlikely to experience rapid share price growth. Although it’s increased 33% since October 2020, the baseline for comparison was when the pandemic was still a thing. Of more relevance, the stock’s 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. That’s why I think it’s a stock for passive income investors to consider.