Double your money with this high-yielding Reit

The Rule of 72 is a useful formula that is used to estimate the number of years required to double invested money at a given annual rate of return. For instance, if an investment generates an annualised return of 12 per cent, it will double your money in six years. Halve the annualised return to only 6 per cent and you need to be invested for twice as long.

Investors should be paying attention to this formula because the repricing of risk, in both the bond and equity markets, has meant achieving a double-digit annualised return from income-producing assets can now be achieved with less risk.

A good example is Alternative Income Reit (AIRE:56.6p), a group that owns 18 commercial long-leasehold and freehold properties. The fully-let portfolio includes care homes, hotels, student housing, nurseries, car showrooms and petrol stations. Around 97 per cent of the portfolio’s income stream is reviewed on an upwards-only, inflation-linked basis to either the retail price index (RPI) or the consumer price index (CPI), thus offering a valuable inflation hedge. In the financial year to 30 June 2024, 58 per cent of the group’s income will be subject to rent reviews, so adding upside to the current passing rental income of £7.6mn on the £107mn investment portfolio.

A weighted average unexpired lease term of 17 years to first break means that investors don’t have to worry about voids unless tenants get into financial difficulty. That’s not an issue as 100 per cent of rent was collected in the last financial year and high collection rates are likely to be maintained given the high-end market demand for the type of properties owned.

There is absolutely no risk of default on the group’s borrowings either as the lowly geared portfolio benefits from low-cost borrowings. A fully utilised £41mn loan facility with Canada Life has a fixed interest rate of 3.19 per cent and has another two years to maturity. Indeed, annual operating profit of £6.9mn covered the £1.4mn interest cost almost five times in the 12 months to 30 June 2023. This enabled the board to raise the annual dividend per share by 10 per cent to 6.05p at a cash cost of £4.9mn.

Deep discount to book value and high dividend yield

True, property valuations took a near-9 per cent hit in the six months to 31 December 2022 due to the negative impact of the inflation-induced yield shift that affected all property companies. However, net asset value (NAV) per share has held steady at 84p in the six months to 30 June 2023 and the disposal of a hotel in Glasgow after the financial year-end realised £7.5mn, or 7.9 per cent above book value.

The point is that the shares not only trade 33 per cent below NAV but offer a thumping 10.7 per cent dividend yield, too. This means that investors looking to double their money over the next six years only need to eke out a miserly 1.3 per cent of annual capital upside to do so. Of course, interest rates are likely to be higher when the group comes to refinancing its debt in two years’ time, but so too will the rent roll. To put this into perspective, even if Alternative Income Reit is forced to refinance at an interest rate of 5 per cent in October 2025, the £0.7mn increase in the annual debt servicing charge should be covered by the likely inflation-linked increase in annual passing rent roll on the portfolio.

I am not sure investors have taken this factor into account, otherwise the shares wouldn’t be offering a near-11 per cent dividend yield right now. Furthermore, the portfolio is now being valued on a net initial yield (NIY) of 6.6 per cent, so unless there is another negative movement in investment yields, then the rising rent roll should drive up the value of the portfolio, too. This makes the 10 per cent share price decline (net of dividends) since I covered the interim results in March even harder to justify.

If you’re looking for an investment that could double your money within six years, and most likely far sooner, Alternative Income Reit offers the right credentials. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.