broker report

From Intersuisse today:

ALE Property Group LEP 15 May 2008

Page 2 - Intersuisse - Friday, 16 May 2008 - (See Page 6 for Disclaimer and Disclosures)

Woolworths acquires 19.9% strategic holding from Hedley Leisure & Gaming

Recommendation: Buy for soundly underpinned double-digit tax-deferred yield

Investment Rationale
LEP pays high tax deferred distributions by virtue of its highly geared structure
which also affords growth prospects through the underlying value of its pub
portfolio with annual CPI rent adjustments. The price halved in recent months as
Listed Property Trusts came under pressure. Despite some recovery, LEP
remains on a very strong yield and below NTA.
Last December LEP hedged a significant proportion of its debt to mitigate
interest costs, ensuring its strong yield prospects. This move and the potential for
expansion prospects add to LEP’s attractions around current prices.
Events since our April 2008 review
 We reviewed ALE as a Buy on 3 April at $2.71. Since before then, funding
pressures on Hedley Leisure & Gaming Property Trust (HLG) have been
remarked on in the press, with the possibility mooted that Woolworths
(WOW) might be interested in HLG’s 23% stake in LEP.
 On 12 May WOW announced it had entered into an unconditional contract
to acquire a 19.9% interest in LEP from HLG at a price of $3.34 cash per
security, for a total cost of $57m. In addition, HLG will receive the benefit of
the value of the next distribution paid by LEP on those securities. This has
been flagged at 16.75 cents per security.
 WOW advises that LEP is a strategic investment and it has no current
intention of increasing its stake. WOW notes that the last disclosed NTA of
LEP was $3.40 per security. We note that that was an independent
valuation at June 2007, confirmed in December 2007, based on a sum of
the properties. A premium should be appropriate on a whole portfolio basis.
 The deal by WOW removes a potential overhang of the securities of LEP
and sets a value on its securities – of $3.40 ex or $3.56 cum next dividend.
 Clearly WOW was an interested buyer, holding 75% of ALH, the long-term
lessor of LEP’s $800m pub portfolio. It was also a cashed-up buyer, but not
one that would typically invest in real estate compared with turnover.
 We believe the deal sets a realistic floor on the value of LEP, some 10% or
more above the current market price. In combination with the high yield, tax
deferred to a large extent for the next years, LEP is an attractive proposition
for the longer-term investor focused on yield with growth prospects.
 ALE expects distributions to be 100% tax deferred for FY08 and FY09 and
at least 75% tax deferred for FY10 and FY11. It had earlier expected 50%
deferral for FY12 also. For many clients this can be as good as franking.
 For 1H08, LEP total distribution was 16.75¢ per security, up 6.7% on Dec
06. This is 0.97¢ below distributable income. Property assets were revalued
to $836m, reflecting the November 2007CPI rent increase. The security
buyback to date is 5.8% or $21.6m. The $245m CPI Hedge transaction in
December 07 (below) adds significant distributable cash flow. 100% of
LEP’s debt remains hedged for a weighted average of 11.9 years.
 For 1H08, against revenue of $26.0m, borrowing expense was $14.6m,
management expense $1.3m, Land Tax $0.8m. Distributable Fair Value
Gains were $6.0m. Total liabilities were 66% of total assets.
 FY 08 total distribution guidance remains at least 33.5¢ per security.
Valuable acquisition opportunities are expected to become available.
 Major investments by ALH are enhancing the value of ALE’s properties as
ALH makes leasehold additions and enhancements to ALE’s buildings. ALH
takes development risk; it has been active in adding Dan Murphy outlets
and is a natural partner in future pub acquisition prospects. Leases to ALH
mostly run to 2028 plus four 10 year options, indexed annually to CPI (state
based). Leases are ‘triple net’ – ie. ALH pays all insurance, maintenance
and outgoings (except land tax in QLD).
Recommendation Impact
LEP is attractive for its double-digit yield, likely to be largely tax deferred to 2012.
The portfolio is a unique ‘vanilla’ LPT offering steady upside growth.