Alpha Real Trust (ARTL:175p), an investor in high-yielding property and asset-backed debt and equity investments, has reported an 18 per cent rise in net asset value (NAV) per share to a record high of 204.3p in the 12 months to end-March 2019, buoyed by material gains on asset sales. In particular, the company sold off a 450,000 sq ft data centre in Frankfurt, Germany for €20m more than its €24.8m (£22.1m) carrying value and realised £15.4m, or £3.1m above book value, from a 664-unit residential rental sector development in Monk Bridge, Leeds.
At the financial year-end, the investment portfolio was worth £137m, including cash of £58m; high-yielding equity in property investments worth £34.5m; high-yielding debt of £36.1m, up almost threefold in the 12-month trading period; and other property investments of £8.8m. In the past three months, the company has increased high-yielding debt within the portfolio further to £40.8m, primarily senior secured lending and secured mezzanine finance.
The plan now is to ramp up high-yielding debt lending to £85m, thus repositioning the company towards generating a higher proportion of attractive income returns rather than holding assets for capital gains. Given that Alpha made mid-teens returns from this activity in the financial year, it makes sense to do so. Each loan is typically for a term of two years on a maximum loan-to-value ratio of 75 per cent, and is secured on real estate and development assets. Alpha has a strong pipeline of lending opportunities to target to generate attractive risk-adjusted income returns.
Other major investments in the portfolio include a 30 per cent stake worth £19.2m in the H2O shopping centre in Madrid, which continues to benefit from record visitor numbers, strong like-for-like sales performance from tenants and produces an attractive 6 per cent yield on equity. Alpha is also generating a high return on last summer’s €16.7m (£14.8m) acquisition of an 11.8-acre freehold industrial facility close to Hamburg, Germany, which is leased to Veolia, an international industrial specialist in water, waste and energy management. Net of interest payments on the €9.5m non-recourse debt secured on the facility, the only debt Alpha has, this investment produces an annualised post-tax income return of 7.3 per cent on the company’s £6m invested equity.
Shifting focus to income-producing assets, and a tender offer
The shift in focus to income-producing assets is good news for the quarterly dividend, which was raised by a third to 0.8p a share, with next month’s payout going ex-dividend on 27 June 2019. Since I first advised buying Alpha’s shares, at 80p ('High-yield property play', 10 February 2016), the company has paid out total dividends of 7.4p a share, a useful income stream. Alpha’s share price has risen by 118 per cent to 175p, too. Given that Alpha has surplus cash, the board is proposing a tender offer, at 175p, to return £29.2m to redeem 24.99 per cent of the issued share capital and so reward shareholders.
I would suggest taking up your full entitlement in the tender to crystallise part of the hefty gains you have made on this holding. For example, if you originally purchased 10,000 shares, at 80p, in February 2016 on my advice, then you will have banked dividends of £740 on your £8,000 investment and I would recommend selling 2,500 shares in the tender (closing date 5 July) to realise a further £4,375 of cash. This still leaves you holding 7,500 shares with a break-even point of £2,885, or 38.5p a share, on which you are receiving dividend income of £480 a year, an attractive return. Moreover, those 7,500 shares have a market price of £13,125.
The attractive quarterly income aside, it’s worth retaining a financial interest in Alpha as the tender offer is accretive to NAV per share, and the portfolio still offers potential for further capital gains. That’s because, based on a post-tender NAV of £107.4m and a reduced share count of 50.1m shares, Alpha’s NAV per share rises from 204.3p to 214.5p. Spot NAV per share is actually even higher still once you take into account sterling’s weakness against the euro since end-March 2019, which has increased the sterling value of the equity held in the Hamburg and Madrid properties by £822,000, adding a further 1.6p a share to NAV per share. Effectively, even at 175p a share, the share price is 19 per cent below my estimate of the post-tender NAV per share, an unwarranted discount even if Alpha’s value creation for shareholders will be more income-focused. Run profits.
Finally, Alpha Real Trust, diversified financial group Ramsdens Holdings (RFX) and software company Scisys (SSY) – three companies I have covered in the past week on the back of major newsflow – were three of the 26 case studies I published in my book, Successful Stock Picking Strategies, highlighting the value creation for shareholders, but more importantly explaining just why these companies made good investments in the first place and detailing what you should look out for in your own stockpicking to try to replicate that success.
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