With a market capitalisation of £57m, the company is well below the radar of most institutions which may warrant a small cap liquidity discount, but there’s still no justification for the shares to be trading a third below end December 2015 net asset value of 125p. There’s a decent dividend too as the board declares a quarterly dividend of 0.6p a share, implying a yield of almost 3 per cent, with the payout covered three times over by net profits earned on the portfolio.
The investment case was compelling enough to prompt me to initiate coverage on the company a couple of months ago (‘High yield property play’, 10 February 2016). However, the shares are trading only 5 per cent above my recommended buy in level even though the board has subsequently issued a very detailed and bullish pre-close trading update, the significance of which seems to have passed investors by.
Currency gains set to boost net asset value
In particular, it’s worth noting the valuation of the company’s wholly owned H20 shopping centre in Madrid, comprising 118 retail units with a gross letting space of 51,825 sq metres, a multiplex cinema, a supermarket let to leading Spanish operator Mercadona, and restaurants. The equity interest in the property is in the books for €29m after accounting for a £51m mortgage secured on the property which is the only debt Alpha Real Trust has. However, the company has used an end December 2015 exchange rate of £1:€1.357 to derive the sterling value of its equity interest in the property. The current exchange rate is actually £1:€1.234 which means the equity is worth £23.5m, rather than £21.4m reported figure at the end of December.
This means that based on 69.3m shares in issue we can expect a further valuation uplift of 3p a share when Alpha Real Trust reports its full year results to end 31 March 2016 in mid-June. It could be more because I understand that the centre attracted record visitor numbers in 2015 with footfall over 8 per cent up on 2014, and having signed 13 new lease contracts on over 2,000 sq metres of space, the tenant mix has improved too.
I would also point out that sterling has fallen by 10 per cent against the Norwegian Krone since the start of 2016. That’s significant because the company owns a 47 per cent stake in an Isle of Man domiciled open ended investment company that invests in a geared property investment vehicle, comprising four directly owned industrial and office properties located around Oslo. The equity in the vehicle was valued at €7m at the end of last year, so Alpha Real Trust’s interest is now worth £2.7m rather than the last reported book value of £2.4m, adding a further 0.4p a share to its net asset value.
In addition, Alpha Real Trust owns a 18.7 per cent shareholding in a small listed property company, Industrial Multi Property Trust (IMPT:150p). Alpha Real Trust also provides IMPT with a subordinated five-year loan of £10.3m that expires in December 2018. In its recent full-year results, IMPT's portfolio was revalued upwards by 5 per cent to £81.6m. But because the loan-to-value ratio is around 76 per cent, the net effect was to propel IMPT’s net asset value up by almost a fifth to 260p a share, and with it the share price too. As a result, Alpha Real Trust’s shareholding of 1.57m shares in IMPT now has an open market value of £2.4m, or £700,000 higher than at the end of December 2015. In other words, this adds 1p a share to its own net asset value.
There is scope for further upside on this investment given that Alpha Real Trust’s share of IMPT’s net assets is actually over £4m and IMPT has been selling off some of its well-diversified portfolio of 53 multi-let and high occupancy light industrial property and office properties well above book value. In fact, six buildings were sold for £3.3m before sales costs, or almost 50 per cent higher than their most recent valuation. Disposals are enabling IMPT to repay debt and reduce its loan-to-value ratio, so removing some of the distress risk embedded in the share price which has led to the deep share price discount to book value.
Alpha Real Trust also has an investment in the Galaxia project, a development site extending to 11.2 acres located in NOIDA, an established, well planned suburb of Delhi that benefits from new infrastructure projects and is one of the principal office micromarkets in India. I reckon that the company’s conservative book value of this investment has increased by £200,000 since the end of December based on currency fluctuations alone. This adds a further 0.3p a share to Alpha Real Trust’s own book value.
In other words, the company’s book value per share at the end of March 2016 is at least 130p a share, up from 125p at the end of December, and 112p at the end of March 2015. Moreover, this ignores the potential for revaluations on a host of other investments.
Taking the hint
Indeed, it’s worth noting comments from the board in the pre-close trading update that “the real estate debt lending market remains active. Loan-to-value ratios have increased and interest rate margins have reduced. The combination of comparatively low interest rates and greater liquidity is positive for Alpha Real Trust’s equity investments where values and liquidity may be further enhanced. It also indicates increasingly protected exit positions upon refinancing for the company's debt investments”.
Furthermore, with regards to its high yield equity property investments “asset pricing could be perceived to be running slightly ahead of currently demonstrable occupational market fundamentals”. That should clearly be positive for revaluations at the year-end.
I would also flag up that the company has sent out a circular to shareholders with a resolution to renew the share buyback authority granted at the annual meeting in September 2014. In other words, some of the £5.5m of cash on the company’s balance sheet could shortly be deployed on share buybacks if investors sanction a repurchase programme, as undoubtedly they will. It would make sense to do so because I conservatively expect Alpha Real Trust’s net asset value per share to rise by at least 16 per cent to 130p in the financial year to end March 2016, with the risk firmly skewed to the upside, so any buyback will be net asset value accretive. It will be earnings enhancing too given the shares trade on a modest 11 times 12-month rolling post-tax earnings.
The bottom line is that Alpha Real Trust’s results in mid-June will make for a rather good read for the reasons I have outlined above, and investors have failed to price this in. Rated on a thumping 35 per cent share price discount to my March 2016 year-end net asset value estimate of 130p, the shares rate a strong buy at 84p in my view with potentially 25 per cent upside to my target price of 105p. Buy.
