Aspen Group (ASX:APZ) recently signed an unconditional contract to sell its last significant legacy asset, marking the end of a 10-year hangover.
Aspen’s party started before the GFC. Like many property based businesses of that era, the exuberance of the time was evident on Aspen’s balance sheet. It’s asset base peaked at $653m in 2008, supercharged with $230m of debt. But as the crisis set in, asset values fell but debt stood still and Aspen found itself in a tight spot.
Nearly 10 years on and Aspen has finally repaid its borrowings but it took many asset sales at discounted prices to do so: assets fell to just $132m in December 2016.
But a troublesome past need not matter today. After selling Spearwood Industrial Estate for $28m (before costs) last month, Aspen is cashed up with its sights on a new strategy.
It already owns a mix of retirement, holiday and transient worker parks, and it’s intent on adding more to its 'affordable accommodation' portfolio. These assets have been bought on the expectation of un-levered yields above 9%, establishing an increasingly robust cash flow stream as its diversity increases.
The Spearwood proceeds will help fund a further three holiday park acquisitions. After that, a recently secured $80m finance facility with Westpac (ASX:WBC) will provide the next round of ammunition.
Using low-cost debt to fund 9% returning assets will supercharge return on equity. If these acquisitions pan out well, then Aspen's current price, at a slight premium to tangible equity, is likely to prove cheap.
But as Aspen's troubled decade shows, using debt always adds to the risks. There is a good argument that property assets should have a sensible amount of gearing, and the Westpac facility merely takes Aspen from under-geared to neutrally-geared. But the best property managers think in countercyclical terms, and 8 years into the recovery, you wonder if Aspen will begin leveraging up at precisely the wrong time to do so.
We can see a scenario where Aspen produces acceptable, but not spectacular, returns from here.
But our hurdle rate is much higher than that. And with more attractive propositions currently under consideration, Aspen is a pass for us. But we’ll check back in if a big discount to net tangible assets appears.