Hello LEP followers,I have been doing more work on ALE to...

Hello LEP followers,

I have been doing more work on ALE to understand where I think value lies.

Like any REIT, it's important to understand what the value of the underlying properties are, so you can determine the NTA. ALE provides valuations on the properties and based on those valuations, the NTA is $3.09/share meaning at today's $4.00/share it is still trading at a 30% premium to NTA.

The thesis ALE has been selling, is that the properties are materially under rented and so even though you are buying them on a ~4.2% yield (at current prices) there will be a rental reversion in 2028 when there is an uncapped market rent review.

Question:

1. ALE claims the statutory valuations do not take into account the rent reversions in 2028 and are mainly based on cap rates. This means that the valuer looks at the current rent and what capitalisation rate similar pubs are selling for and does not price in the rent reversion. Eg. A pub has a current rent of $500k net and similar pubs are selling on a 6% cap rate, so the value of the pub is $8.3m. This is why ALE management say that the premium to NTA is warranted, because no uplift from the rent reversion is factored into the statutory valuations.
2. I have gone through the property compendium with all the valuations and a number of the pubs have very low cap rates. Eg. Young & Jackson Hotel has a cap rate of 2.75%. Gepps Cross Hotel in Adeliade at 4.02%, Racehorse Hotel at 3.22%. As anyone in the commercial property world would know, even super high quality assets sell on no lower than a 5% yield, if rented at market rents. What is very clear to me based on the low yields for some of these properties is that the statutory valuations take into account to a large extent the rent reversions expected in 2028.
3. So why is this trading at such a large premium to NTA?

I really would welcome opposing thoughts on this. I would love to have my opinion changed and for me to view this as a great buying opportunity. However at current prices, I feel like the "rent reversion" story is well and truly baked in and come 2028 there may well be a rent reversion but the NTA will not actually increase.