EUR 850.00 For Business Accounts Only

Morningstar | ALE Property Group’s Negotiations on Rental Uplift Prolonged but No Change to our AUD 5.10 FVE

Rents at the majority of narrow-moat-rated ALE Property’s pubs--80 out of 86--are in the process of being adjusted, effective November 2018. The landlord is in ongoing discussions with its sole tenant, ALH Group, regarding the rent review at about half of the 80 pubs. We understand a 10% increase in rent has been agreed upon at the other half. At the outstanding properties, ALH Group is seeking a rent reduction of 10%, the maximum allowed at the current market review. However, we continue to forecast a 10% lift in rents at all 80 pubs in our base case, given average rents are significantly below market rents.

ALH Group’s profitability has been growing at a higher rate than ALE Property’s rental income. EBITDAR, or EBITDA before rent, across the more than 300 pubs operated by ALH Group has increased at a CAGR of over 4% in the past five years, while average rents at ALE Property’s pubs only grew in line with the consumer price index, at under 2%. EBITDAR is the key metric in determining rents.

The impact of a less favourable than expected outcome for ALE Property at the fiscal 2019 rent reviews is immaterial to our intrinsic valuation. Were rents to remain flat at the outstanding half of properties at the current review, our fair value estimate declines by a mere AUD 16 cents to AUD 4.94.

We expect the current reviews to result in rental income growth of 7% and 5%, in fiscal years 2019 and 2020, respectively, before growth moderates to 2.5% from fiscal 2022. We maintain our AUD 5.10 fair value estimate and forecast distributions to grow by 2.5% to AUD 21.3 cents per security in fiscal 2019, with any shortfall in distributable income to be supplemented from cash balances. Securities in ALE Property are screening as slightly undervalued. In general, in recent transactions valuations of triple-net lease with high quality tenants such as ALH Group remain attractive. For instance, the sale of a Bunnings in Hobart yielded a cap rate of 3.1% in December 2018.