Alpha Real Trust (ARTL:175p), an investor in high-yielding property and asset-backed debt and equity investments, has increased its pro-forma net asset value (NAV) by 4 per cent to a record high of £115.2m (212.5p a share) in the three months to 30 June 2019 after adjusting for the post-period cash return of £22.9m to shareholders.
The key take from the robust quarterly trading update was the progress made in ramping up Alpha’s high-yielding secured senior debt and mezzanine finance lending activities, thus repositioning the company towards generating a higher proportion of attractive income returns rather than holding assets for capital gains. Alpha held a portfolio of 31 loans worth £39.1m at the end of June 2019, up from £7.1m only 12 months earlier, having granted five loans worth £7.1m in the quarter. The four loans redeemed in the three-month period generated an annualised return of 14.9 per cent, highlighting the mid-teens returns made from this lucrative lending activity.
Since the period end, the secured senior debt and mezzanine loan portfolio has increased to £45.3m net of redemptions, accounting for a third of my live NAV estimate of £126m (211.4p a share, after adjusting for a quarterly dividend of 0.8p paid in July). The plan is to ramp up the portfolio to £70m. It makes sense to do so as I reckon Alpha still holds £22m of net cash from the asset disposals I highlighted in my last article (‘Alpha alert for hefty cash returns’, 18 June 2019). 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 £20.6m (up from £19.2m in March 2019) in the H2O shopping centre in Madrid, which continues to benefit from record visitor numbers (up 5.6 per cent year on year), strong like-for-like sales performance from tenants, and produces an attractive 5.5 per cent yield on equity.
I also note that Alpha has just bought out the majority shareholder in Alpha UK Property Fund Asset Company (No.2) to give it 100 per cent of the equity. That company holds two unleveraged industrial assets in England that are worth £16m and generate an annual return of 8.5 per cent, thus increasing Alpha’s income stream further. Alpha paid £10.6m for the shareholders’ 66.4 per cent equity by issuing 5m shares held in Treasury at a price of 211.4p.
As a sign of the directors’ confidence, Alpha’s board have hiked the quarterly dividend by 25 per cent to 1p a share. Since I first advised buying Alpha’s shares, at 80p ('High-yield property play', 10 Feb 2016), the company has paid out total dividends of 8.2p a share, a useful income stream. As the secured loan portfolio increases further I can see scope for additional increases in the dividend.
There is potential for capital gains, too, as Alpha is pursuing the sale of the Armouries residential development site it owns in Birmingham, which has planning consent for 162 residential units and ground floor commercial areas. This is in the books for £4.5m and the company has agreed an offer of £4.9m. Also, the property lending activities are naturally accretive to NAV given the high mid-teens return they generate.
Please note that following the introduction of MIFiD II, your broker may require you to pass a sophisticated investor assessment prior to being able to deal the shares. It would pay to do so because with Alpha’s shares trading on a 17.5 per cent discount to NAV, and the investment risk skewed to the upside, new share price highs beckon. Buy.
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