ALE Property's results were about as boring as the company itself – but we see that as a blessing.
As long as its tenant ALH Group (75% owned by Woolworths) continues to pay the rent, not much should happen until 2018 when a market rent review, capped at 10% growth, is due to take place. In the meantime, shareholders – including our own Equity Income Portfolio – can sit comfortably and collect the dividends.
Distributions up 19%
ALH continues to invest heavily in renovations
Good signs for 2018 capped market rent review
Those dividends increased around 19% in 2016 to 20 cents per share, although distributable profit improved only 2%. The difference is funded by increased borrowings, as the company tries to keep gearing (currently 43%) close to the targeted 50% on an asset base that keeps rising due to revaluations. A little caution is warranted here, because this could all happen in reverse if property valuations went backwards.
That doesn’t mean things aren’t happening behind the scenes.
ALH has continued to invest heavily into the properties. For example, a total of around $22 million was sunk into three properties – with the Crows Nest Hotel in Sydney, for example, getting a new floor as part of its refurbishment.
|Twelve months to Jun 30||2016||2015|| /(–)
|Rental income ($m)||56.2||55.2||2|
|Borrowing expense ($m)||20.7||21.4||(3)|
|Distributable profit ($m)||29.6||29.1||2|
|Distribution per share (c)||20.0*||16.9||19|
|Gearing (%) (see Note)||42.9||45.7||(6)|
|NTA per share ($)||2.53||2.27||11|
|*10.1 cents interim distribution (unfranked), ex date already past|
|Note: Gearing = net debt / (total tangible assets - cash)|
The importance of these improvements should not be underestimated. At the end of the leases, ALH will have the option to re-lease the premises or surrender these improvements to ALE for a token sum. Considering the money sunk into the properties, ALE is unsurprisingly confident that ALH will renew. Of even more importance is the impact these refurbishments have on the future market rent reviews.
As the properties are improved, the profitability of the pub usually increases as more people walk through their doors for a pint, punt or pizza. The higher the pubs' profit, the greater the eventual rent increase will be when the unrestricted review takes place in 2028.
ALH and ALE are also in discussions about how best to use the vast amount of land that ALE owns. Currently only 25% of ALE’s property is occupied by buildings meaning that if it can convince ALH to develop more Dan Murphy’s for example, it will be able to extract more rent and improve rental growth and distributions.
New development could be lucrative. Following the redevelopment of the Anglers Arms, for example, ALH and ALE negotiated a rental increase of about 10%.
ALE Property has been a great performer for us. Low interest rates have boosted property prices and increased the attractions of stocks paying reliable dividends. That's more than doubled ALE's share price (and provided a total return of 145% including dividends) since we recommended the stock in ALE Property: Down in one in May 2012 (Buy for yield — $2.08). The time to buy has passed but, with the first of the market reviews inching closer, we recommend you HOLD.