ALE Property: Interim result 2018
Recommendation
A listed property trust whose rental income from its 86 pubs rises each year by inflation is almost certain to report a mundane result.
Six months to 31 Dec | 2017 | 2016 | /(–) (%) |
---|---|---|---|
Distrib. profit ($m) | 14.6 | 15.1 | (3) |
Distrib. per share (c)* | 10.35 | 10.15 | 2 |
Gearing (%)** | 42.6 | 44.5 | (4) |
NTA per share ($) | 3.04 | 2.66 | 14 |
* Unfranked, ex date already passed | |||
** Gearing defined as net debt/(total tangible assets – cash) |
Yet things should get a little more exciting over the next year.
All of ALE Property's 86 pubs are leased to ALH, which is 75% owned by Woolworths.
The terms of the leases limit annual rental increases to inflation (as measured by the relevant state consumer price indices) and so ALE's revenue inched up this half. Higher borrowing costs and increased management costs reduced distributable profit, but distributions have again increased as ALE dipped into its cash reserves.
The increase in management costs relates to the upcoming limited market rent review for 76 of these pubs. Under their lease terms, the market rent review conducted in November this year could result in their rents rising by up to 10% (or possibly falling by up to 10%).
As noted previously, we think a rental increase of close to 10% is likely for most of these pubs due to them being substantially under-rented when the leases commenced in 2003. Many have also benefitted from substantial capital investment by the tenant – ALH – while the 48% of its pubs located in Victoria have likely seen increased gaming income from changes to Victorian pokies laws.
This also means ALE is well placed to benefit from the unrestricted market rent reviews on these pubs in 2028.
ALE's gearing (using the bankers' definition) is 41.7%, below its target of 50-55%. As such, once the November 2018 rent reviews are complete, distributions could rise faster than inflation or investors could perhaps benefit from a one-off capital return as gearing is returned closer to its target range.
ALE offers a historical unfranked dividend yield of 4.3% and we're bumping up our Buy price from $3.50 to $4 and our Sell price from $6 to $7. HOLD.
Note: The Intelligent Investor Equity Income Portfolio owns shares in ALE Property. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.