Very Reliable Yield with Growth from Top WOW-backed PUBS

ALE Property Group (LEP) is the largest freehold owner of pubs in Australia.

LEP was established in 2003 with properties acquired from Foster’s. LEP currently owns 87 pub freehold properties. This is a high quality portfolio across the mainland capital cities (1); all properties are on long-term triple-net (2) leases that were established on a 25 year initial term with an average 16.8 years remaining. There are four options for the lessee to extend its lease by up to 40 years. All the properties are 100% leased to ALH which is Australia’s leading pub operator, 75% owned by Woolworths Limited. ALH is the owner of the pub licences and certain development rights.

(1) 34 pubs are in Victoria, 32 in Queensland, 10 in NSW, 7 in SA and 4 in WA.

(2) Three of the 87 properties are on double-net leases.

As a high yield investment proposition, LEP has a number of attractions:

Its leases provide for a minimum CPI growth for the entire lease term; the weighted average debt maturity is a comfortable 6.8 years; the portfolio is significantly under rented, securing its future earning and capital position; valuations are supported by sales evidence and independent valuations.

LEP has a policy of only paying distributions from free cash flow, subject to the minimum requirement to distribute taxable income of the trust under the Trust Deed.

It is commercially advantageous for Woolworths to improve the pub properties, which underpins and enhances their long-term value.

LEP offers an FY12 annualised distribution yield of 8% on current prices. The FY11 distributions were tax-deferred.

Half-year Performance & Estimates - LEP

Year-end June	1H12A	FY12A	1H13A	FY13A	1H14A	FY14E	FY15E
Sales, $m	0.00	0.00	0.00	0.00	0.00	54.0	56.0
EBITDA, $m	0.00	0.00	26.8	47.2	0.00	47.4	48.9
EBIT, $m	0.00	0.00	26.8	47.1	0.00	47.4	48.9
Report NPAT, $m	13.7	-30.8	15.9	25.3	16.5
Adj. NPAT, $m					16.5	32.3	27.3
Reported EPS, ¢	9.00	-19.00	9.00	14.00	8.00
Adjusted EPS, ¢					8.00	16.00	14.00
EPS %FY/Growth	-47%		64%	-174%	-11%	14%	-13%
Dividend, ¢	8.0	16.0	8.0	16.0	8.2	16.00	16.80
Franking, %	0%	0%	0%	0%	0%	0%	0%
EBITDA Margin	0	0	0	0	******%	87.8%	87.3%
NPAT Margin	0	0	0	0	******%	59.8%	48.8%
ROE, %	0	-10%	4%	7%	4%
EBIT/Interest	0.0	0.0	2.5	2.2	2.72
Net Debt / Equity	0	1.3	1.04	1.09	1.05
CashFlow/Sh, ¢	6.7	16.0	10.7	18.9	7.9	16.7	16.2
Y/E Shares, m	159.0	159.9	193.6	194.3	195.7

Notes

Data sourced from IRESS Market Technology Limited. EPS Growth compared with the pcp is shown in most columns except the first half years which show their percentage of full year EPS. In a handful of cases, unadjusted share splits, or changes between positive and negative values, may give strange changes in ratios.

Recent News Highlights

As at 12/06/2012 : see details at www.alegroup.com.au   (new window? Shift+Click)

15/02/2012     Results 1H12: quite satisfactory; longer term upside from ALE's development of leased properties

16/12/2011     Increase in Property Valuations as at 31 December 2011; Vale Hotel - ALH Appeal Dismissed

08/12/2011     AGM - Chairman's Address & Managing Director`s Presentation

Russell Research in the media

Stock Picks for The Bull.com.au -  23 July 2012

Hold: ALE Property Group (LEP)

Its portfolio includes about 90 high quality hotels across Australia. All the pubs are leased to a Woolworths joint venture on favourable terms. This provides a yield of almost 7.5 per cent. It offers long-term upside as Woolworths continues to develop the properties.

Company Overview

LEP, or the ALE Group, is a stapled security which comprises Australian Leisure and Entertainment Property Management Limited and Australian Leisure and Entertainment Property Trust.

LEP has a disciplined and consistent approach to acquisition and divestment:

Over the past seven years ALE has: acquired 11 properties for $100m at an average cap. rate of 7.2%; sold 22 properties for $124m at an average cap. rate of 6.1%; sold all properties at a significant premium to acquisition cost.

Acquisition criteria continue to include: quality tenant covenant with diverse locations and sustainable profitability; long term leases with an indexed rental structure, where the outgoings and development risks are assumed by the tenant; smaller value properties that are attractive to a range of investors; properties (including pubs) that will remain strategically important to the tenant’s core operations.

The Vale Hotel Matter exemplifies the favourable long-term value in LEP:

ALH’s application to subdivide land at the Vale Hotel in Mulgrave, Melbourne has been subject to various court processes. On 16 December 2009, the Victorian Supreme Court delivered judgment which endorsed LEP's interpretation of the relevant provisions of the lease. The matter was heard in the Victorian Court of Appeal and on 15 December 2011 all three judges unanimously dismissed the appeal by ALH and awarded costs to LEP. The matter is successfully concluded.

Throughout this process LEP continued to enjoy a constructive operational relationship with ALH’s management. It is helpful for both parties and particularly encouraging for LEP and its investors that the Courts have now clarified the interpretation of the lease and LEP looks forward to being able to continue its support of ALH’s development of LEP’s properties. We agree with LEP that additional development will further enhance ALH’s already very profitable operations. It will also of course underwrite the increasing value of the LEP properties. Woolworths appears to have a continuing and very viable strategy of undertaking such developments to enhance its returns from the pubs and their profitability.