AVN: A 7% yield and room to grow scale

Wednesday, October 4th, 2017

ASX Code: AVN
Security price: $2.25
FY18 value: $2.50
Industry: REITs
FY18 forecast distribution: 16.4 cents per share

Aventus Retail Property Fund (AVN) was first listed in October 2015, backed by a consortium led by retail mogul Brett Blundy and at the time was a novel concept in the Australian market. A retail REIT comprised of ‘big box’ format household and bulky goods retailers, primarily in suburban areas, Aventus took advantage of the relatively fragmented nature of this segment, using management’s strong retail background to create one of the highest yielding REITs on the market. Most of AVN’s tenants are well-established with national reach and significant staying power – destination retail in the eyes of many consumers. National retailers like JB Hi-Fi, Coles, Woolworths, Bunnings, Harvey Norman and Super Cheap Auto made up 84% of the portfolio in FY17.

A 7.2% yield in FY18 is grounds enough for interest but on top of that, there is scope for income growth from rental increases, as well as valuation upside through further cap rate compression. The latter will likely require improvements to the underlying property, such as that being undertaken at its Carringbah location. This does come at the expense of only a moderate weighted average lease expiry (WALE) of 4.2 years but on the flipside, this should keep rentals nearer to prevailing market rates. Occupancy at 98% is very high, and has been achieved consistently with low incentives and positive leasing spreads. Gearing of 39% (net debt/net tangible assets) is around average for a retail REIT, and interest cover at 5 times is relatively strong.

Aventus is also differentiated by its growth optionality as it estimates that around 80% of its current portfolio has expansion opportunities. Further long-term optionality may come from the ~37% of its portfolio currently zoned for other uses. This may be re-zoned for large format retail or other non-industrial uses, potentially allowing AVN to expand its portfolio, or sell the land. We also expect AVN to continue consolidating this relatively fragmented property sector as opportunities present.

It is for these reasons that we believe AVN’s value exceeds its net tangible asset base, yet it currently trades in line with it, though this view may be tempered by its relatively high portfolio concentration. As it stands, FY18 value is estimated at $2.50 per share but investors should note that in an environment where market interest rates are rising, property increases will depend on rising rental income rather than capitalisation rate decline.

Damen Kloeckner is an Analyst for the Clime Australian Income Fund.

Disclosure: AVN is held across a number of CBG Asset Management’s portfolios. CBG is part of the Clime Group.

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