Aventus Retail Property Fund

Transcription

1 AUSTRALIA AVN AU Price (at 06:10, 29 Apr 2016 GMT) A$2.16 Volatility Index Low GICS sector Real Estate Market cap A$m day avg turnover A$m 0.7 Number shares on issue m Investment fundamentals Year end 30 Jun 2016E 2017E 2018E 2019E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % nmf PGCFPS x PGCFPS rel x EPS adj EPS adj growth % nmf PER adj x PER rel x Total DPS Total DPS growth % nmf Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x AVN AU vs ASX 200 Prop Source: FactSet, Macquarie Research, May 2016 (all figures in AUD unless noted) 2 May 2016 Macquarie Securities (Australia) Limited Consolidating Event AVN has announced a fully underwritten $104.5m equity raising to fund the acquisition of a five-asset portfolio of large format retail centres from the Blackstone Group for $236.0m (including transaction costs). Impact Acquisition consistent with strategy. The acquisition is consistent with AVN s articulated strategy to participate in further sector consolidation opportunities in what remains a highly fragmented industry. The appeal of such a strategy includes diversification and scale benefits, and, on current metrics, should be earnings, cash flow and distribution accretive. Earnings accretive. We estimate the transaction is ~1.8% accretive to FY17 FFO per share with AVN providing a revised 1H17 FFO forecast of 8.7cpu, 4.0% higher than the PDS forecast of 8.32cpu. The changes to our earnings forecasts are lower than that implied by revised company guidance because our earnings already included previously announced acquisitions and a lower cost of debt, which in isolation were also accretive to earnings, and we have also allowed for additional downtime at Sunshine Coast Home Centre (Bunnings expiry). AVN also expects to increase its distribution with 1H17 DPS guidance of 7.75cpu also 3.5% higher than the PDS forecast. Our FY17 DPS forecast of 15.7cps implies a yield of 7.8% at the $2.03ps issue price which is attractive relative to other REITs under coverage see chart on page 3 of this report. Initially NTA dilutive but NTA moves higher factoring revaluations. Pro forma NTA declines from $1.89pu to ~$1.86pu reflecting the write-off of acquisition costs although AVN has also announced a $46m (+14%) uplift on the revaluation of five properties in the existing portfolio and taking these revaluations into account, all else constant, NTA rises to ~$1.98ps. The equity raise price of $2.03ps accordingly represents a premium to pro forma NTA of ~3% and, whilst not directly comparable given the revised valuations, is a significantly lower premium than other AREITs under our coverage universe see page 3 of this report. Gearing higher but will come back down. Similarly, pro forma gearing, taking into account the transaction, rises to 37%, the higher end of the group s targeted 30-40% range but taking into account the revaluations on the five assets, gearing will reduce slightly to ~36%. We continue to expect further positive revaluations across the portfolio over the next 6-12 months which will act to reduce gearing further, noting that five assets in the portfolio remain unchanged from 30 June Earnings and target price revision FFO: FY %, FY %, FY %. Price catalyst Due to research restrictions, Macquarie cannot advise its valuation on AVN AU at present. Action and recommendation Due to research restrictions, Macquarie cannot advise its recommendation on AVN AU at present. Please refer to page 7 for important disclosures and analyst certification, or on our website

2 Earnings accretive transaction AVN has provided a revised 1H17 FFO forecast of 8.7cpu, 4.0% higher than the PDS forecast of 8.32cpu. In isolation, we estimate that the acquisition of the Blackstone properties is 1.6% accretive to our 1H17 FFO per share forecast and 1.8% to our FY17 FFO per share forecast. The changes to our earnings forecasts are lower than that implied by revised company guidance because our earnings already included previously announced acquisitions and a lower cost of debt, which in isolation were also accretive to earnings, and we have also allowed for additional downtime at Sunshine Coast Home (Bunnings expiry in December 2016). We have also removed the Cranbourne development from our forecasts. The development was originally intended to add ~7,100 sqm of new GLA between the existing centre at Cranbourne and the recently completed Masters tenancy. In light of recent announcements in relation to the Masters venture (see our previous research on Masters here: Listed property sector Tools down at Masters), we have removed the development project at Cranbourne from our forecasts. It is also worthwhile noting that our earnings forecasts benefit from a continued reduction in debt costs consistent with our economics teams view of two official cash rate cuts and hence reduction in bank bill swap rates. Fig 1 Blackstone transaction is 1.6% accretive to our 1H17 FFO per share forecast Prior forecast $m Prior EFPOWA m Previous FFO per share cps Less other adjustments $m 0.0 (0.5) FFOps post adjustments cps Adjustments change % 0.1% (0.8%) FFO post adjustments $m Blackstone profit $m Pro-forma FFO $m Pro-forma EFPOWA m Post Blackstone FFO cps Total change % 1.7% 1.0% Blackstone contribution 1.6% 1.8% Notes: 1. Adjustments relate to revised assumptions at Cranbourne and Sunshine Coast Home. 1H17 FY17 NTA dilutive due to transaction costs revaluations bring NTA upwards As indicated in the table below, the transaction is dilutive to NTA due to transaction costs that are incurred with the acquisition of the portfolio. There are $16.5m of transaction costs which are predominantly related to stamp duty. NTA as at December 2015 was $1.89ps, which declines 1.3% or 3cps to $1.86ps pro forma for the portfolio acquisition and equity raising. This increases 11cps or ~6% to $1.98ps following the revaluation of five properties which resulted in $46m of positive property revaluations. We understand the revaluations were driven equally by cap rate compression and income growth. Gearing has also increased to 37.0% as a result of the portfolio acquisition but remains within the group s target range of 30-40%. We note that gearing declines to ~36% following the inclusion of the positive revaluations (+$46m). Following this transaction, AVN will have ~$78m of balance sheet capacity, allowing gearing to go to ~40%. Whilst we expect the group to focus on bedding down this acquisition, the covenant gearing limit is 55%. 2 May

3 Fig 2 Transaction is NTA dilutive due to acquisition costs revaluations bring NTA higher NTA impact Dec-15 Acquisition Postacquisitions Revals Post-revals Tuggerah spend Post-revals Cash $m Investment properties $m , , ,251.0 Other assets $m Total assets $m , , ,261.4 Debt $m Other liabilities $m Total liabilities $m Net assets $m Share count m NTA per share $ps Change % (1.3%) 6.3% -% Gearing % 31.9% 37.0% 35.7% 36.3% Notes: 1. Gearing definition is net debt / total assets less cash. 2. Debt represents total debt drawn and will not match the balance sheet due to capitalised debt establishment costs. Dividend yield, PE and price to NTA relative to other REITs The issue price of $2.03ps represents a 7.8% FY17 DPS yield and an 11.1x FY17 PE using our forecasts. Charts showing how this compares to other predominately rent collecting REITs are provided below. Fig 3 AVN DPS yield and P/E ratio vs other listed REITs FY17 Div. Yield, % 9.0% 7.8% 8.0% 8.2% 8.0% 6.7% 7.0% 6.0% 5.7% 5.8% 6.0% 5.4% 5.0% 4.7% 4.9% 4.9% 4.0% 3.0% 2.0% Retail Large/diversified Small-caps FY17 PE (x) Retail Large/diversified Small-caps From an NTA perspective, the $2.03ps issue price represents a 9% premium to pro forma NTA or a ~3% premium taking into account the announced revaluations. As can be seen from the chart below, the majority of REITs continue to trade at double-digit premiums to NTA, albeit we note the limitations from comparability given AVN s NTA in the chart below includes the post 31 December 2015 revaluations. Fig 4 AVN equity raise price to NTA and gearing vs other listed REITs % NTA NAV 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 3% 26% 27% 41% 31% 21% (1%) 13% 71% Retail Large/diversified Small caps 40% 24% %, Gearing 50.0% 46% 45.0% Sector average = 34% 40% 40.0% 38% 35.7% 34% 33% 35.0% 33% 31% 30% 30.0% 26% 25.0% 23% 20.0% 15.0% 10.0% Retail Large/diversified Small-caps Notes: 1. AVN NTA includes announced revaluations post 31 December 2015 and so is not directly comparable to the other REITs whose NTA is as at 31 December Excluding the revaluations, the AVN equity raise price relative to pro forma NTA is a ~9% premium. 2. Price to NAV not provided for AVN due to research restrictions. Other REIT ratios based on the high end of our NAV range. 3. AVN gearing is pro forma for the Blackstone transaction as well as post balance date revaluations and development spend at Tuggerah. All other REITs are as at 31 December May

4 Transaction details AVN has announced a fully underwritten $104.5m equity raising to fund the acquisition of a five asset portfolio of large format retail centres from the Blackstone Group for $236.0m (including transaction costs). The fixed issue price of $2.03 represents a ~3% premium to pro-forma NTA of $1.98 (post revaluations and all else constant). The equity raising is a 3-for-20 non-renounceable rights issue. Unitholders that take up the offer will be entitled to the distribution of 3.68cps for the quarter ended 30 June Entities associated with Brett Blundy will not take up their entitlements and equity associated with Brett Blundy will enter into an arm s length sub-underwriting commitment. A new $100m tranche will be added under an existing debt facility for this acquisition. The group has received a letter of confirmation from its lenders. The source and use of funds is shown below. Fig 5 Acquisition has a greater element of debt funding Source of funds Equity - Entitlement offer proceeds $m Debt - new and existing facilities $m Total $m Use of funds Purchase of acquisition properties $m Transaction costs $m 16.5 Net working capital $m 0.5 Total $m The five acquired properties are all located on the east coast. By state, two are located in NSW, two in QLD and one is in Victoria. Home Central Shepparton is the only regionally located asset in the acquisition portfolio while the other four are located in metro areas. The portfolio has ~90% fixed or CPI linked escalators. Fig 6 Acquisition portfolio statistics Bankstown McGrath s Hill Shepparton Logan MegaCentre Macgregor MegaCentre Portfolio State NSW NSW VIC QLD QLD Valuation $m Cap rate % 7.25% 7.25% 8.00% 7.25% 7.75% 7.38% WALE Years Occupancy %, GLA 100% 100% 81% 98% 100% 96.5% Retailers # Site area sqm 40,240 37,840 30,290 26,790 29, ,288 GLA sqm 17,171 16,478 13,661 26,998 12,505 86,813 Car park spaces # ,885 Opening Catchment size # 632,030 89, , , ,070 1,602,620 The acquisition is consistent with AVN s articulated strategy to participate in further sector consolidation opportunities in what remains a highly fragmented industry. The appeal of such a strategy includes diversification and scale benefits. The table below shows the portfolio stats post acquisition. Fig 7 Portfolio gaining scale Portfolio Units Dec-15 Post acquisition Valuation $m ,194.6 Properties # WACR % Value/sqm $/sqm ,533.0 Occupancy % WALE years GLA sqm 384, ,705 Site area sqm 930,545 1,094,833 Tenancies # Metro locations % 60% 65% 2 May

5 Operational update AVN also provided an operational update since December Leasing. The group has completed 17 new leases over 17,600sqm (portfolio: 385,000 sqm pre acquisition). On the pre-acquisition portfolio, FY16 lease expiries declined to 3% (December 2015: 5%) and FY17 lease expiries declined to 14% (December 2015: 17%). Dick Smith. AVN has received signed offers on two of the three Dick Smith tenancies which will be vacated this month (May). Masters continues to meet all obligations under its 14-year lease at Cranbourne (Victoria). Fig 8 Progress on FY17 expiries %, Lease expiries by area (Post acquisition) 18% 16% 16% 14% 14% 14% 12% 12% 11% 10% 9% 8% 7% 6% 6% 4% 3% 3% 3% 2% 1% -% Vacant FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY25+ Development. The current development projects were said to be on track and within budget (Peninsula and Tuggerah) with practical completion expected this month (May). The remaining development pipeline will be $30m for FY17. The group also announced positive property revaluations of $46m across five assets, driven equally by cap rate compression and income growth. The five assets were: i) Ballarat Home; ii) Belrose Super Centre; iii) Kotara Home; iv) Midland Home; and v) Tuggerah Super Centre. The WACR of these five assets is 7.24%, representing a 54bps decline from prior valuations. 2 May

6 FINANCIAL SUMMARY Units FY16F FY17F FY18F FY19F FY20F Profit and Loss NPI $m Other income $m Total operating expenses $m (5.4) (9.3) (9.5) (9.8) (10.1) EBIT $m Net interest expense $m (7.6) (13.8) (13.8) (16.7) (20.3) Tax expense $m Underlying NPAT $m Statutory adjustments $m (5.5) Reported NPAT $m Per Share Data EPS cps Growth % 47.6% 3.9% 2.3% -1.4% DPS cps Growth % 53.6% 4.1% 2.8% 1.6% FFO cps Growth % 52.7% 4.1% 2.8% -1.2% AFFO cps Growth % 53.2% 4.6% 2.5% (1.8%) Cash flow statement Operating cash flows $m (22.3) Investing cash flows $m (426.6) (11.7) (4.8) (5.1) (5.5) Financing cash flows $m (58.2) (68.1) (69.6) (68.2) Net cash flow $m Free cash flow $m (27.8) Balance Sheet Cash $m Investment properties $m 1, , , , ,426.0 Intangibles $m Other assets $m Total assets $m 1, , , , ,454.8 Current borrowings $m Non-current borrowings $m Other liabilities $m Total liabilities $m Retained earnings $m Total shareholders' equity $m May

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients) Company-specific disclosures: AVN AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Aventus Retail Property Fund in the past 12 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. 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