First-quarter results from Alpha Real Trust (ARTL:130p), an investor in high-yielding property and asset-backed debt and equity investments highlight how the company continues to recycle the £50m of cash proceeds realised from last year’s disposals to boost its income stream, and create capital value for shareholders in the process.
Alpha’s high-yielding mezzanine debt portfolio increased in value from £12.8m to £16.8m in the three-month period to end June 2018 to account for 14 per cent of the total investment portfolio of £119m. These loans are typically made over a two-year term on a maximum loan-to-value ratio of 75 per cent and generate an annual income between 9 and 16 per cent. Since the end of June the value of Alpha’s mezzanine debt portfolio has risen to in excess of £18m.
High yielding equity in property investments accounts for a further £26.5m of Alpha’s investment portfolio, and is performing well, generating £1.2m valuation uplift in the three-month period. This largely reflects gains from Alpha’s 30 per cent stake in the H2O shopping centre in Madrid which continues to benefit from record visitor numbers and strong like-for-like sales performance from tenants.
The key driver of future capital growth will come from Alpha’s portfolio of three build-to-rent investments that between them account for 29.2 per cent of the portfolio: a five-storey data centre in Frankfurt encompassing 450,000 sq ft which is currently being actively marketed to potential occupiers; Alpha’s Unity and Armouries residential private rented sector (PRS) 90,000 sq ft scheme in Birmingham which has planning consent for 162 residential apartments and has a gross development value (GDV) of £35m; and a 664 unit PRS development in Monk Bridge, Leeds, which has a GDV of £160m. Alpha has now selected construction partners for both UK PRS projects and plans to invest £23.7m of its own cash alongside debt financing to enhance its return on equity. It is also exploring joint development opportunities with potential partners.
Given that the £35m GDV of the Birmingham scheme is 50 per cent higher than the £18.5m development cost and the £4.8m carrying value of the land in Alpha’s accounts then the company should not have a shortage of potential partners. Open market rents on the 162 flats are estimated at £925 to £1,200, so with a sensible level of gearing the scheme should produce a high return on equity from rental income. The economics of the much larger Leeds scheme are equally compelling, both for capital growth and income.
Releasing cash from existing investments
As part of the cash recycling process Alpha has been selling down its 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. Factoring in £9m of divestment in the fund since the end of March, Alpha now holds an investment worth £19.4m which generated a 4 per cent post-tax income in the past 12 months.
Pro-forma cash of £16m on the balance sheet already backs up two-thirds of the aforementioned investment in the two UK PRS schemes, so Alpha has just used some of its cash pile to acquire an 11.8 acre freehold industrial facility close to Hamburg, Germany, that is leased to Veolia, an international industrial specialist in water, waste and energy management. The annual passing rent of €900,000 (£800,000) has periodic inflation linked adjustments over the unexpired 24-year lease term, and the tenant is responsible for building maintenance. Alpha has part funded the €17m (£15.5m) purchase price through a €9.5m fixed rate 10-year loan, so will earn a high single digit index-linked return on its equity. The investment also offers potential for capital growth from an industrial location in a major German logistics and infrastructure hub.
Galaxia project conservatively valued
The other interesting take for me was the update on Alpha’s investment in the Galaxia project, a development site located in NOIDA, an established suburb of Delhi that is one of the principal office micro-markets in India. Having initiated arbitration proceedings against its joint venture development partner Logix Group in order to protect its investment, and subsequently won a judgement in the Delhi High Court, which was subsequently upheld in the Supreme Court of India, the award and interest accrued now stands at £13.2m, well above the £3.9m carrying value in Alpha’s accounts.
The Delhi High Court has issued a warrant of attachment against the primary residential homes owned by the promoters of Logix. Alpha has had these properties independently valued at £6m. The next hearing in the Supreme Court is imminent and it’s only reasonable to expect Alpha to make progress on the execution of the award including the release of a £1.1m cash deposit made by Logix on the order of the Supreme Court.
The point being that the difference between the £3.9m carrying value of the award in Alpha’s accounts, and the £13.2m required by the directors of Logix to settle it in full, is now worth 13.5p per Alpha share based on 68.5m shares in issue. Of course, there is no certainty that Alpha will be able to recover the full award, but with Alpha’s share price 26 per cent below net asset value of 174.8p a share then it’s not in the price either. Nor for that matter is any valuation upside from Alpha’s build-to-rent projects.
Director buying
Please note that due to the fact that Alpha is closed-ended investment company traded on the Specialist Fund Segment of the London Stock Exchange, your broker may require you to pass an assessment test before allowing you to trade the shares as a sophisticated retail investor. It’s worth doing so as I continue to see value in Alpha's shares which have to date generated a 66 per cent total return on an offer-to-bid basis in the 32 months since I first recommended buying them at 80p ('High-yield property play', 10 February 2016) after taking into account 10 quarterly dividends of 0.6p a share.
Clearly, Phillip Rose, a director of the company, sees value at the current level too as he has splashed out £1m buying 752,525 shares at 133p each since my last article (‘Seeking more alpha’, 19 June 2018). That's a significant purchase and one that has raised his stake six-fold to 892,220 shares, representing 1.3 per cent of the issued share capital. His lead is worth following. Buy.
Finally, I have published 16 company specific articles in the past fortnight including two lengthy columns on new companies for digital subscribers at the end of last week. All my articles are available to view on my home page.
■ Simon Thompson's new book Successful Stock Picking Strategies 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 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. Details of the content of both books can be viewed on www.ypdbooks.com.
