With a market capitalisation of £56m, well below the radar of most institutions, it has been overlooked by investors, so much so that its share price trades on an unwarranted 33 per cent discount to last reported net asset value of 123.5p. It's a valuation that not only builds in a 'margin of safety', but offers decent scope for capital growth too. Free cash on the balance sheet of £9.6m equates to 11 per cent of the trust's net asset value of £86.7m, so offering the board flexibility to take advantage of investment opportunities.
That's exactly what the board have been doing, having just purchased a 4.2 acre site in Leeds with planning consent for 269 flats. The £3.75m cost of the land equates to a modest £14,000 a plot, and follows a similar deal in Birmingham where it acquired a residential site with planning for 162 flats and commercial units. Last week’s acquisition of a 40-year lease on a 15-acre site in Perthshire with consent to develop a wood fired combined heat and power plant is of interest too. The company is in advanced talks with capital partners for co-financing the £30m project, based on a running yield in excess of 9 per cent, and the aim is to have the plant up and running next year. And it's the solid income being generated from existing property holdings that's enabling the company to seek out value accretive new investments.
For instance, ground rent investments held through a freehold income authorised fund (FIAF) account for £16.2m, or 18.6 per cent of that net asset figure. These rock solid investments consist of a diversified portfolio of UK residential property freehold ground rents which are held with a view to achieving steady and predictable returns, a consistent income stream and prospects for growth. The FIAF is ungeared, has an unbroken 22-year track record of positive inflation beating returns, and generated a total annual return of 8.5 per cent for Alpha Real Estate last financial year. There are reasons to expect this record to be maintained given that 81 per cent of the freeholds owned have a form of inflation protection through periodic uplifts linked to the Retail Price Index (RPI), property values or fixed uplifts.
High-yielding UK commercial property
The equity investment made in Active UK Real Estate, a company listed on the Channel Islands stock exchange (www.cisx.com) is of interest too. Alpha Real Trust invested £3.2m for a 20.5 per cent stake in the company last summer in order to increase its exposure to the high yielding UK commercial real estate sector. The fund outperformed the IPD benchmark on an annual basis to September 2015, posting a total return of 15.7 per cent compared to the benchmark return of 14.5 per cent. The holding has risen by £700,000 in value since Alpha Real Trust's last balance sheet date, adding a penny to the company's net asset value.
Alpha Real Trust also provides mezzanine finance of £9.8m to Active UK Real Estate on which it earns a 9 per cent annual coupon plus upfront and exit fees, in addition to a 2 per cent extension fee if the loan is not repaid within the first 12 months. Based upon Active UK Real Estate's last portfolio valuation of £47.4m, and after factoring in bank finance of £19.5m and Alpha Real Trust's loan of £9.8m, its loan-to-value ratio is comfortable at 62 per cent. In aggregate, the equity interest in Active UK Real Estate and the mezzanine loan account for 15 per cent of Alpha Real Trust's portfolio.
In addition, Alpha Real Trust a 19 per cent shareholding worth £1.8m in a small listed property company, Industrial Multi Property Trust (IMPT: 108p). Alpha Real Trust also provides IMPT with a subordinated five-year loan expiring in December 2018 and on which it earns a chunky annual coupon of 15 per cent. IMPT's portfolio was valued at £81m at the end of September 2015 and it had external bank and mezzanine finance of £52m. So after factoring in Alpha Real Trust's subordinated loan of £12.3m then the loan-to-value ratio is nearer to 79 per cent.
IMPT's portfolio comprises a well-diversified portfolio of 53 multi-let properties offering 500 leasable units with a total floor area of 1.7m square feet, all of which are located in the UK with 86 per cent invested in light industrial property and the rest in offices. The properties offer attractively priced accommodation for local occupiers which explains why occupancy rates are around 87 per cent. But with tenants favouring shorter term flexible leases the weighted average lease length is only 3.6 years to expiry and just two years to the next tenant break. With such a high cost of debt and short lease lengths, it's hardly a surprise that IMPT's shares are rated on a 55 per cent discount to net asset value of 237p.
It's therefore worth noting that the board of IMPT are planning to refinance the portfolio in the fourth quarter this year, but if a refinancing is not possible it will “continue to review alternative ways to improve shareholder value including a managed winding up of the company.” It looks a win-win situation for Alpha Real Trust as a wind up would undoubtedly narrow IMPT's share price discount to net asset value, while a refinancing would lower IMPT's cost of debt and remove some of the distress risk which is depressing its share price. True, it would mean a repayment of Alpha Real's high interest debt, but the upside from the equity interest is an offsetting factor. The equity and loan investment in IMPT accounts for 16 per cent of Alpha Real Trust's portfolio.
Overseas investments
The company also owns the 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 centre was acquired in April 2010 and to date Alpha Real Trust has invested €5.6m (£4.4m) in capital improvements.
It's paying off as the weighted average lease length is 10.4 years to expiry, occupancy rates are just shy of 90 per cent, footfall hit a record last year, and like-for-like sales of tenants rose by 8 per cent. The centre has a primary catchment area of 166,000 people and a total catchment of 2.2m people. It's proving a profitable investment too, generating a 15 per cent yield on cost in Alpha Real Trust's last financial year. The H2O centre was revalued upwards from £65.5m to £71.5m in the six months to end September 2015 which in turn sent the value of Alpha's Real Trust equity interest surging by a third to £21m, after adjusting for a £51m mortgage secured on the property which is the only debt Alpha Real Trust has. The shopping centre accounts for around a quarter of the company's portfolio by value.
There are prospects of further valuation gains when the company next reports too. That's because the company only partially hedges €5m of its euro currency exposure through a foreign exchange forward contract. That's working in its favour right now because sterling has fallen by 6 per cent to £1:€1.27 since Alpha Real Trust's last balance sheet date, so will give a significant uplift to the value of its investment in the H20 centre. In fact, the currency gain alone will have added £4.5m, or 6.4p a share to Alpha Real Trust's net asset value.
Upside to Indian investment
There is potential for a windfall gain on Alpha Real Trust's 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. That's because Alpha Real Trust initiated arbitration proceedings against its joint venture development partner Logix Group in order to protect its Galaxia investment. In January 2015, the Arbitral Tribunal, by a majority, decreed that Logix and its principals had breached the terms of the shareholders agreement and awarded Alpha Real Trust a sum of £9.2m, representing the return of its initial investment with interest, and costs. This sum accrues interest at an annual rate of 15 per cent until it's repaid by Logix.
The Arbitral Tribunal also ruled that the company has no obligation or liability to fund the outstanding NOIDA lease rent under the shareholders agreement. Alpha Real Trust is actively seeking full recovery of the sums awarded and has been awarded by the courts of India a charge over the private residence of the principals of Logix: Shakti Nath, Meena Nath and Vikram Nath.
The Galaxia investment is held in Alpha Real Trust's accounts at £4.5m, or less than half the £10.7m current value of the award made. If the company can recoup this sum, then it will add almost 9p a share to its last reported net asset value of 123.5p a share.
Risks
Clearly, there are risks to owning shares in a company which has 26 per cent of its portfolio invested in high yielding mezzanine and subordinated property debt; a further 35 per cent in high yielding equity investments, mainly the stakes in the H2O centre, IMPT and Active Real Estate Fund; and an investment in India reliant on the courts for a positive outcome. Indeed, several of the investments held are in companies or special purpose vehicles that have borrowings, albeit loan-to-value ratios are not stretched in my view.
For instance, Alpha Real Trust invested £1.2m (current value £1.5m) in a joint venture that owns Phase 1000 of Cambourne Business Park, located eight miles west of Cambridge's city centre. Constructed in 1999, the property consists of three Grade 'A' specification modern office buildings, comprising 9,767 sq metres of office space and 475 car parking spaces. Alpha Real Trust contributed 10 per cent of the equity investment, based on an 8.5 per cent net initial yield, when the property was acquired, in partnership with an overseas investor, for £23m and funded by a £10.8m bank loan. The loan-to-value ratio is currently 41 per cent and Alpha Real Trust earned a near 12 per cent annualised income return on the investment in the last financial year. Nonetheless, it's worth flagging up that these returns are being generated through gearing up some of its investments.
Also, 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. These investments mainly comprise four directly owned industrial and office properties located around Oslo. They were last valued at NOK 150.7m (£11.7m) and have a passing rent of £1.2m. The loan-to-value ratio on the portfolio is modest at 46 per cent, but there is exchange rate risk even though sterling has held up well against the Norwegian Krone.
Target price
Taking into consideration the risks above, I still feel that the shares should not be trading a third below net asset value especially as Alpha Real Trust generates annual post-tax profits of £5.3m from its property investments, excluding valuation movements, which supports a well covered dividend. In fact, underlying EPS of 7.5p easily covers a quarterly dividend of 0.6p a share, implying a yield of 3 per cent.
So, with the distinct likelihood that net asset value will rise sharply again when the company reports its full-year results to end March 2015, having risen by 9 per cent in the half year to end September 2015, I rate Alpha Real Trust's shares a decent buy at 80p and have an initial target price of 105p. Buy.
MORE FROM SIMON THOMPSON...
I have written articles on the following 65 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
