I already own shares in a few real estate investment trusts (REITs) as they’re a great way to boost my passive income.
Another stock I’m looking to add to my holdings when I next have some investable cash is LXI REIT (LSE: LXI). Here’s why!
Long leases provide stable income
LXI focuses on acquiring and renting out a diverse range of property assets to yield income. This is a bullish trait I like as diversification can offer protection against a downturn in one area. Plus, the business looks to tie down its tenants to longer term leases, 20 to 30 years, ideally.
The attraction of REITs is that they must return 90% of profits to shareholders, hence why I view them as ideal second-income stocks.
LXI shares have struggled in recent months. I’m not surprised, nor worried. Macroeconomic issues including soaring inflation and rising interest rates have caused havoc with markets as well as the property sector.
The bull and bear case
As I’m bullish on LXI shares, I think it prudent to share risks that could hinder any payouts I’m looking to receive.
Firstly, the business did announce an ill-fated deal to snap up 18 Sainsbury’s supermarkets earlier in the year. The deal did not go ahead as it would have meant borrowing heavily to finance the deal. Unfortunately, the shares haven’t quite recovered yet.
Growth is tricky in high interest times, like now. I’ll keep an eye on the firm’s growth plans, with the hope there aren’t any further bumps in the road.
Another issue for LXI is the fact that a lot of its tenants could find it harder to pay their rent, despite long-term leases in place. This is directly linked to the current economic outlook and cost-of-living crisis. Defaults are never good news for REITs. This can hinder profits and payouts.
On to the good stuff then, LXI’s modus operandi of tying its customers into long-leases is great for me. This is because it can ensure stable income and passive income. At present, its average tenancy stands at over 25 years until the first break clause.
Moving onto the level of return, LXI’s dividend yield of 8.5% is significantly higher than the FTSE 250 average of 1.9%. However, I do understand dividends that are never guaranteed.
Finally, LXI shares look decent value for money right now on a price-to-earnings ratio of 11. They could fall further during the current market volatility, which would make them even more enticing for me.
I understand that LXI could come under shorter-term pressure. However, I’m a long-term investor – which I’d define as a five- to 10-year period – therefore I’m more interested in the extra income LXI shares could provide me over this time period.
I reckon LXI’s long-term lease business model, as well as its diversification strategy, is key for it to be a great income stock for me and my holdings.