- NAV down 1.5 per cent to £123.1mn (207.3p)
- Adjusted EPS up from 7.7p to 10.3p
- Quarterly dividend of 1p a share
- Cash, money market and gilt holdings worth £53.2mn (90p)
- 43 per cent discount to NAV
Investors are taking an incredibly cautious stance towards Alpha Real Trust (ARTL:117.5p), a company that invests in high-yielding property and asset-backed debt and equity investments.
Having sold off its stake in the H2O shopping centre in Madrid following the 31 March 2024 financial year-end, Alpha invested the £12.6mn of cash proceeds and £3.9mn of capital from repayments on its commercial loan book into UK gilts and Treasury Bills. It means that the company has a £53.2mn (90p) combined holding of cash, money market deposits and short-dated UK government securities, a sum that accounts for 43 per cent of the company’s net asset value (NAV) of £123.1mn and 76 per cent of its market capitalisation of £69.8mn. Effectively, other assets worth £70mn are in the price for £16.8mn, or 76 per cent below their latest valuations.
The investment portfolio includes three unencumbered Travelodge hotels in Lowestoft, Suffolk and Wadebridge, Cornwall. Their combined valuation of £10.8mn (18p) implies an 8.3 per cent yield on a passing rent of £0.9mn, which will only rise given that the properties benefit from long leases (18 to 36 years unexpired terms) and UK inflation-linked rent reviews.
In addition, Alpha holds €8.6mn (£7.3mn) of equity in a freehold industrial facility near Hamburg, Germany valued at €18mn (£15.4mn). It is leased to waste management group Veolia on an inflation-linked rent, produces an 8.9 per cent yield on equity, and the €9.5mn fixed-rate mortgage secured on the asset is non-recourse to the group.
Other Alpha investments include £4.2mn (7.1p) in three high-yielding listed equity funds: GCP Infrastructure Investments (GCP), GCP Asset Backed Income Fund (GABI) and Sequoia Economic Infrastructure Income (SEQI). These invest in ungeared long-dated leased real estate and generate a 6.2 per cent dividend yield. Alpha also owns seven affordable housing residential units in Liverpool which have been valued at £0.6mn.
Free ride on a commercial loan book
Effectively, the combined value of these property assets and Alpha’s holdings of cash, money market and UK government securities are worth 9 per cent more than the company's market capitalisation. Shareholders also get a free ride on a £46.4mn (78p) portfolio of 13 senior secured and mezzanine property loans that generated annualised average weighted income returns of 10.3 and 17.3 per cent, respectively, in the latest 12-month reporting period.
True, Alpha has provided £4.1mn for expected credit losses (ECL) on four commercial loans that have entered receivership and an additional £1.6mn on the remainder of the loan portfolio, albeit with an average loan to value of 62.5 per cent there is a margin of safety given the security (first and second charges and personal guarantees). Importantly, the combined ECL of £5.7mn is already provided for in the accounts.
It’s worth noting that eight loans totalling £30.8mn were fully repaid during the financial year, so the vast majority of loans have been performing well. Clearly, the loan book has considerable value even if Alpha’s share price, which trades on a hefty 43 per cent discount to NAV, fails to reflect this. The loan book has shrunk 16 per cent in the past 12 months, too, which further mitigates investment risk.
So, having suggested buying the shares, at 118p, in my 2024 Bargain Share portfolio, I have no hesitation reiterating that advice. A solid 1p-a-share quarterly dividend, which underpins a 3.4 per cent dividend yield, offers a reliable income stream to complement what should be a decent capital gain on the holding in due course. Buy.
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