Bargain Shares 2024: An outstanding investment with an anomalous discount

The track record of the investment team behind Alpha Real Trust (ARTL), a company that invests in high-yielding property and asset-backed debt and equity investments, is outstanding.

In the 10 years to 30 September 2023, the investment manager has doubled the company’s net asset value (NAV) per share from 106p to 214p and paid out total dividends of 34.5p per share, to deliver a total return of 134 per cent. In the same 10-year holding period, the FTSE All-Share Total Return index has shed 4.5 per cent of its value.

In addition, the board returned £22.8mn to shareholders through a tender offer at 175p a share in 2019, having banked eye-watering gains on the disposal of a data centre site in Frankfurt and the Monk Bridge residential development site in Leeds. The company also returned a further £11.2mn of surplus cash three years later through a tender offer at 175p a share.

The fact that Alpha’s latest NAV per share of 214.3p is within 1 per cent of its record high is testament to the investment manager calling the commercial property cycle astutely before the downturn, having materially reduced exposure to development risk and recycled capital into cash-flow-driven investments. Alpha is now mainly focused on investments offering inflation protection through index-linked income adjustments and those with potential for capital gains. It also has a high-yielding commercial loan portfolio and is cash rich following some well-timed disposals.

In fact, Alpha’s holdings of cash and short-dated UK Treasury bonds account for £25.1mn (43p) of its book value of £125mn and produce around £1.1mn of interest income. In addition, the company owns three listed investments worth £4.1mn (7p) in high-yielding listed equity funds: GCP Infrastructure Investments (GCP), GCP Asset Backed Income Fund (GABI) and Sequoia Economic Infrastructure Income (SEQI). These funds invest in ungeared long-dated leased real estate and generate a 6.2 per cent yield. 

Strip out the £29.2mn combined value of cash, short-dated UK Treasury bonds and the three listed investments from Alpha’s £69mn market capitalisation, and other assets are in the price for only £40mn, or almost 60 per cent below their carrying value of £96.1mn.

Unravelling the anomalous discount

The share price discount is even more anomalous when you consider that almost 30 per cent of the £125mn portfolio is invested in high-yielding property assets including three Travelodge hotels in Lowestoft, Suffolk and Wadebridge, Cornwall. All three properties are unencumbered and benefit from long leases (18 to 37 years unexpired terms) with rent reviews linked to the UK inflation rate. The total passing rent of £0.9mn compares favourably with the £11.1mn (19p) carrying value of the three properties, a sum that backs up 16 per cent of Alpha’s own market capitalisation of £69mn.

In addition, Alpha holds equity of £8.4mn (14.3p a share) in an inflation-linked freehold industrial facility near Hamburg, Germany. It is leased to waste management group Veolia, and generates an 8.9 per cent yield on equity. Although a £8.2mn mortgage is secured on the £16.6mn property, it is non-recourse to the group, covenant-free and has a fixed interest rate until July 2028. The lease has another 23 years to run, so the investment should benefit from rent increases to generate stable high single-digit income returns for Alpha shareholders. The property has capital growth potential, too, as it is in a major logistics and infrastructure hub.

Alpha also owns a valuable 30 per cent equity stake worth £17.4mn (30p) in a joint venture with CBRE Investment Management in the H2O shopping centre in Madrid. H2O was opened in 2007 to provide shopping, restaurants and leisure around landscaped gardens. The centre has a gross lettable area of 55,000 square metres comprising more than 100 retail units, a multiplex cinema, a supermarket (let to leading Spanish operator Mercadona) and restaurants. H2O’s large fashion retailer base includes some of the strongest international fashion brands, including Nike, Zara, Mango, JD Sports, Cortefiel, H&M and C&A.

Although H2O’s trading levels remain below the pre-Covid highs, a recovery is evident. Last year’s visitor numbers were 7 per cent higher than in 2021, albeit 6.8 per cent below pre-Covid levels. Occupancy rates of 92.6 per cent will get a lift when three existing Inditex group brands extend the footprint of existing stores and a new 3,000 square metre store for anchor retailer Primark opens later this year.

The H2O centre has been independently valued at €120mn (£104mn) by Savills, or almost double the €62.2mn debt secured on the property. Borrowings carry an interest rate of Euribor plus 1.9 per cent, but hedges are in place to cap the total interest rate at 4.4 per cent.

What this means is that the 30 per cent stake in H2O, the Hamburg property and the three Travelodge properties are cumulatively worth £36.9mn. Add that to the £29.1mn valuation of Alpha’s holdings of cash, UK Treasury bonds and the three listed infrastructure investments, and almost all of Alpha’s £69mn market capitalisation is backed up by these assets. That leaves a £57.9mn (99p) commercial loan portfolio in the price for free.

High-yielding property loans

Alpha’s portfolio of 18 senior secured and mezzanine property loans generated annualised average weighted income returns of 9.8 and 18.6 per cent, respectively, in the latest six-month reporting period.

Admittedly, Alpha has provided £3.7mn for expected credit losses (ECL) on four loans that have entered receivership, as previously reported. The board is prudently providing for an additional £1.4mn of ECL on the remaining loans, albeit with an average loan to value of 59.5 per cent there is a decent margin of safety given the security (first and second charges and personal guarantees). Furthermore, the combined ECL of £5.1mn is already provided for in the accounts.

It seems incredibly harsh to effectively attribute nil value to Alpha’s commercial loan book given that each loan typically has a term of up to two years, so it could be run off and turned into cash. Not that the directors plan to do that, given the high investment returns earned from this activity even after taking account of the ECL.

It’s worth flagging up that more than three-quarters of Alpha’s commercial loan book is focused on residential property, and is well-diversified across the country. It is possible that some of the £5.1mn ECL impairment charge will reverse given the improved housing market outlook and the fact that yields on UK government debt have contracted markedly since the autumn. This is not only improving affordability for home buyers, but their confidence, too.

Unwarranted share price discount

The bottom line is that a 45 per cent share price discount to NAV is a harsh rating for a company that holds 20 per cent of its assets in cash and UK gilts, almost 30 per cent in high-yielding property, and owns a secured loan portfolio that could easily be run off into cash. Indeed, more than 80 per cent of the loan book is repayable within 12 months and is included in current assets, hence why Alpha Real Trust has a bargain rating of one. Add to that a reliable 1p-a-share quarterly dividend, which underpins a 3.3 per cent dividend yield, and the shares are in bargain basement territory. Buy.