I have been taking a close look at the annual results from Alpha Real Trust (ARTL:132p), an investor in high-yielding property and asset-backed debt and equity investments in western Europe. It’s been an informative exercise as it confirmed the positive stance I made ahead of the results (‘Riding earnings momentum’, 16 Apr 2018).
I first recommended buying the shares at 80p ('High-yield property play', 10 Feb 2016), so after taking into account nine quarterly dividends of 0.6p a share the holding is up 71 per cent. The share price outperformance has been driven by a combination of net asset value (NAV) growth – NAV per share has increased from 123p to 173p since I initiated coverage – and a narrowing of the share price discount to NAV from 33 per cent to 24 per cent.
What really interested me is the methodology behind the valuations of Alpha’s portfolio of three build-to-rent investments that account for 28.2 per cent of the portfolio’s £117m value: a five-storey data centre in Frankfurt encompassing 450,000 sq ft has a gross development value (GDV) of £24.5m and is being marketed to tenants right now; Alpha’s Unity and Armouries residential private rented sector (PRS) scheme in Birmingham which has planning consent for 162 residential apartments and has a GDV of £35m; and a 664 unit PRS development in Monk Bridge, Leeds, which has a GDV of £160m.
Independent valuers calculate that the development cost of the 90,000 sq ft Birmingham scheme is £18.5m (equating to £206 per sq ft). Add that sum to the £4.7m carrying value of the land in Alpha’s accounts and this suggests a thumping developers profit on the £35m scheme. Market rents of the 162 flats are estimated at around £925 to £1,200, based on a 4.3 per cent investment yield.
The Leeds scheme is four times larger so it should deliver even greater returns, one reason why the land has been revalued upwards from £5.5m to £9m in Alpha’s latest accounts. Alpha is sensibly exploring development opportunities with funding partners for both schemes. The implied developers profit not only highlights that it’s cheaper to build rather than acquire existing PRS schemes, but adopting this approach provides a margin of safety, too. Moreover, the solid cash flow from tenants should appeal to low-cost debt funding providers, thus reducing Alpha’s equity requirement – it has earmarked £29.3m of investment alongside debt financing and capital partners for the two PRS projects – so boosting its return on equity.
I also note that the company has been redeploying the £50m cash proceeds made from last year’s disposals to boost its income stream. For example, Alpha’s high-yielding mezzanine loan portfolio has grown to £15.2m and is producing an income return of 14 per cent. The loans are typically over a two-year term and have a maximum loan-to-value ratio of 75 per cent. The company has also raised its stake from 20.5 per cent to 27.8 per cent in Active UK Real Estate (AURE), a company listed on the Channel Islands stock exchange (www.cisx.com) that offers exposure to the high-yielding UK industrial real-estate sector. AURE generated a 13.8 per cent annual return in the 12-month reporting period, well ahead of the 10 per cent return on the IPD benchmark. Alpha’s shareholding is worth £6m.
Importantly, Alpha offers rock-solid backing through its £28m investment in an ungeared UK residential property freehold ground rent authorised fund which has an unbroken 25-year track record of producing positive inflation-beating returns; and retains a 30 per cent stake in the H2O shopping centre in Madrid. Reflecting record visitor numbers and a strong like-for-like sales performance from tenants, the property’s value increased by 8 per cent to €127m (£111m) in the financial year. After deducting a £55m bank loan secured on the shopping centre, and adjusting for a positive net working capital position, this implies Alpha’s stake in H2O is worth £17.6m. The investment risk remains skewed to the upside.
The bottom line is that with Alpha’s market value £28m less than its NAV of £118.5m, we are effectively getting all of its PRS schemes in the price for free even though they will key drivers of future NAV growth. Add to that a quarterly dividend of 0.6p a share (the next payout goes ex-dividend on 28 June), and Alpha’s shares continue to rate a buy.
■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging.
Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.
