In late 2003, Fosters decided it didn't want to run hotels and spun off two businesses, the ALE Property Group (ASX: LEP) to own the freehold titles and the Australian Leisure and Hospitality Group (ALH) to run the pubs and bottle shops. ALH is Australia's largest and most profitable pub and retail liquor operator (now controlled by Woolworths (ASX: WOW)) and it has very long term leases on all 87 of ALE's properties.
Due to this history, the leases have a number of uniquely favourable conditions for ALE as the landlord. For example, ALH is responsible for all capital improvements and has reportedly invested some $250 million over the past six years in the ALE properties but these improvements revert to ALE for a notional $1 on the expiry of the lease. Since ALH is responsible for virtually all the expenses of maintaining the properties and there are annual rent reviews that automatically adjust rents to the consumer price index (CPI), earnings for ALE are practically inflation proofed. In the longer term, there is a market based rent review in 2018 and every ten years after that.
ALE's full year results showed rental income up 3.4%, a distributable profit of 16.71 cents per share and net assets per share of $2.24 (excluding derivative net assets).
Debt is often a concern with property groups and ALE's gearing is at 51.9% with an average term of 5.9 years. While revenue is inflation proofed, ALE has to take specific hedging action to control interest costs and has flagged that it plans to undertake a review of this hedging.
ALE is an Australian Real Estate Industry Trust (A-REIT) with a market cap of $330m. There are some fifty A-REITs listed on the ASX including Westfield Group (ASX: WDC) which is the largest, Westfield Retail Trust (ASX: WRT), CFS Retail Property (ASX: CFX) and the Goodman Group (ASX: GMG).
ALE Property Group is a 'stapled security' consisting of a unit in a trust and a share in the management company. Most or all of the distributions are not franked but currently are tax deferred meaning that you don't pay tax on that portion until you sell the securities.
Foolish takeaway
The securities are trading at around $2.10 which, with a 16 cps dividend, offers a yield of about 7.7%. ALE is different to the other A-REITs in that it has a single, very reliable tenant locked in. It should continue to generate an inflation linked yield at this level.
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Motley Fool contributor Tony Reardon doesnt own shares in any of the securities mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
