Boring company, incredible returns

Who would have thought that 20%+ pa returns were possible from a property trust?

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Beer, cheers, pub, drink

The common misconception is that great returns only come from high-flying excitement machines, companies with flashy stories to tell.

Just consider the success that A2 Milk Company Ltd (ASX: A2M) has achieved as it methodically goes about selling more premium branded dairy nutritional products into the New Zealand, Australian and Chinese consumer markets. Its shareholders have enjoyed returns of 165% for each of the last two years.

In tech, there’s also the share price of Altium Limited (ASX: ALU) which has risen from under $3 in late 2014 to $20 or so today as it continues to develop and sell printed circuit-board software to a global market on the back of the Internet of Things phenomenon.

However, there’s one company out there that is the complete opposite in the excitement stakes, but has nevertheless delivered sensational long-term returns for its owners.

ALE thee

One such listed company is ALE Property Group (ASX: LEP), established when Fosters divested its hotel operations business back in 2003.

In short, it’s an owner of pubs which it leases wholly to Australian Leisure and Hospitality Group (ALH).

ALH runs its pub businesses offering sports bars, bistros, restaurants, cafes, retail liquor and electronic gaming. ALH collects the cash from its operations and pays rent to ALE in accordance with the 25 year agreement it signed at the time it came to market.

The 2003 agreement provides that rent would rise at least in line with CPI before rent reviews take place in 2018 and 2028.

The rent review later this year then may mean rises in rental income across the portfolio of up to 10%. In a decade’s time, the rent reviews are open-ended.

Being a property trust, the income was key for prospective investors at the time of its listing, but I don’t think anyone at the time of its admission to the ASX would have anticipated such bountiful returns.

According to ALE management, a 2003 investment of $1 per stapled security has an accumulated value of $15.62 up to 30 June last year. That’s an annualised return of 21.5% if you include distributions paid along the way.

Over the last decade or so, ALE has left other REITs such as BWP Trust (ASX: BWP), Charter Hall Group (ASX: CHC) and GPT Group (ASX: GPT) in its wake.

Dull is good

ALE has been described as the most boring REIT on the ASX, especially given it hasn’t purchased a single pub property since 2007.

There’s therefore not much business excitement here, but long-term unitholders should be well pleased with how their investment has turned out so far, boring or not.

The anticipated rent reviews too mean there’s a clear pathway for increased rents in the future.

Later this year, could there be an increased distribution or a one-off capital payment, or both? Let’s wait and see.

Despite the lack of franking, ALE should suit most conservative long-term investors as a core holding. You could then add other positions around ALE for diversification as you build out your portfolio, and there are a number of good ideas that you can consider from the Top 3 ASX Blue Chips To Buy In 2018 report below. 

Foolish bottom line

The message is though, don’t be put off by the idea of ‘boring’.

There are a lot of interesting moving parts to the ALE investment thesis at the moment, and it’s possible any risk of rising interest rates will be more than mitigated by increasing rents, leaving unitholders more than satisfied.

If you’re interested in a long-term and predictable income stream, with the added possibility of some capital gains, then ALE certainly deserves a place on your watchlist.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

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*Returns as of January 12th 2022

Motley Fool contributor Edward Vesely owns shares of ALE Property Group. The Motley Fool Australia owns shares of ALE Property Group. The Motley Fool Australia has recommended BWP Trust. 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 Scott Phillips.

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