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Is 360 Capital Total Return Fund the best income stock on the ASX?

The Australian Bureau of Statistics revealed on Wednesday that Australia’s inflation rose 0.5% in the September quarter. Analysts at Citibank believe the soft data increases the chance of a further rate cut next Tuesday to 52% (from 28% previously).

A 25 basis point cut by the Reserve Bank of Australia (RBA) would take the official cash rate to a record low 1.75%.

Banks would likely follow suit in such an event, reducing interest rates on savings accounts (and home loans) by a similar amount. This means depositors should brace for more pain as cash returns drop. Accordingly, a good alternative to traditional cash deposits might be the 360 Capital Total Return Fund (ASX: TOT)(“the Fund“).

What is it?

The Fund is a real estate investment trust (REIT) comprising the Total Return Active Fund and The Total Return Passive Fund. Unlike listed peers Shopping Centres Australasia Property GroupFederation Centres Ltd and Scentre Group (which focus on ownership of shopping centre assets), the Fund invests in real estate across various asset classes and sectors.

The Fund is managed by 360 Capital Investment Management Limited (“the Manager“), which is wholly-owned by 360 Capital Group Ltd (ASX: TGP). The Manager’s mandate is to generate a total return of 12% per annum through investment in high-yielding real estate assets and undervalued REITs.

Why should you buy?

The Total Return Fund listed on the ASX in April 2015, at an issue price of $1.25 per stapled unit. In its product disclosure statement, the Total Return Fund forecast a dividend yield of 9% per annum, implying quarterly distributions of 2.81 cents. It anticipates most distributions will be tax-deferred, meaning no income tax should be payable by the recipient.

So far the Fund has maintained guidance, paying two distributions in-line with forecasts and a special dividend of 1.2 cents in the September quarter so unit holders could fund tax liabilities associated with its 2015 distributions (tell me if your bank account does that!).

What are its fundamentals like?

The Fund has performed poorly since listing, dropping almost 18% to date. At 30 June 2015, the Fund’s net tangible assets (NTA) per stapled unit was $1.22, implying a 17% discount to current prices.

Cash on hand sat at $12 million, with a further $26 million to be received post-settlement of its two Frenchs Forest assets. This cash balance equates to underlying cash of 96 cents per stapled unit, indicating it trades close to the value of its cash balance.

What are its prospects?

Management is using the Fund’s strong balance sheet and substantial discount to NTA as an opportunity to buy-back units in the Fund. This initiative should limit downside risks and benefit unitholders by increasing earnings per share.

The Manager is also pursuing growth through strategic acquisitions, such as the recent 8.3% stake in ASX listed Industria REIT (ASX: IDR). Although such acquisitions foreshadow an expectation of continued increases to property prices, which may or may not occur, 360 Capital Group’s solid track-record of disciplined execution and asset picking should alleviate risks associated with a property market crash.

Importantly, management has reiterated that forecast distributions for the 2016 financial year should be approximately 11.2 cents per security. Given the decline in security price, the Fund now trades on an implied yield of 11%, making it a better prospect than cash in the bank.

Foolish takeaway

The 360 Capital Total Return Fund is not as safe as cash deposits. That’s a fact. It is inextricably linked to the property market, meaning it’s risky if retail, commercial and industrial property prices fall. However, with its forecast dividend yield of 11%, the on-going buy-back and potential for the RBA to cut rates next week, I believe this is one income stock that is worth the risk at current prices.

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Motley Fool contributor Rachit Dudhwala owns shares of 360 Capital Total Return Fund. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.