APN Convenience Retail REIT (ASX:AQR)

Geoff Brunsdon
Non-Exec Chairman
Market Cap (AUD): 263.56M
Sector: Real Estate
Last Trade (AUD): 3.37 +0.03 (+0.9%)
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1. About

APN Convenience Retail REIT (“Convenience Retail”), managed by APN Funds Management Limited, is a listed Australian Real Estate Investment Trust (AREIT) which owns a portfolio of 70 convenience retail assets located in Queensland, Western Australia, New South Wales and Victoria. The portfolio, which is currently valued at $355.2 million, is leased to high-quality tenants on attractive, long-term leases.

Convenience Retail REIT provides investors with:

  • An attractive and defensive distribution yield backed by long term leases to high quality tenants;
  • A weighted average lease expiry (by income) of 12.1 years as at 31 December 2018;
  • A portfolio diversified by geography and tenant;
  • Significant growth opportunity through contracted annual rent increases in all leases and targeted acquisitions; and
  • Access to the people and capabilities of APN Property Group Limited, a dedicated, specialist real estate investment manager which has managed property investments on behalf of its clients for over 20 years, including a long track record in managing service station assets.

2. Business model

 

The Company operates the following divisions:[1]

 

Business

Revenue ($’000)

% of total Revenue

% of Profit (Net Profit)

Profit drivers[2]

Convenience Retail REIT

 $26,438

100.0%

100.0%

The Group’s total comprehensive income was $15,867,000 for the financial year ended 30 June 2018 (30 June 2017: loss of $4,737,000). 18 properties were subject to external independent valuations performed by Savills Valuations Pty Ltd. As a result of this exercise, the value of these properties increased by $4.76 million primarily due to the annual rent increases as well as a tightening of the portfolio’s weighted average market capitalisation rate from 7.17% at IPO to 6.91%.

3. Strategy

 

APN Convenience Retail REIT (“Convenience Retail”):[3]

 

  • AQR will continue to actively manage its portfolio and capital to deliver attractive and sustainable returns to securityholders
  • The Fund is well positioned, it has sustainable income growth which is underpinned by long-term leases with contracted annual rent increases and a prudent level of gearing
  • FY19 FFO guidance is 21.3 – 21.7 cents per security, representing an increase of 5.4 – 7.4% on FY18 (annualised) and an increase of 3.4 – 5.3% on the PDS forecast
  • Distributions guidance is 20.9 cents per security, which is 3% above the PDS forecast
  • This guidance includes the acquisition of Mount Larcom and is subject to current market conditions continuing and no unforeseen events and assumes no further acquisitions

4. Markets

 

The Company operates in the following markets:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth Rate

Funds Management Services

$8 billion

3.8% (annual 13-18)

Real Estate Services

$16 Billion

5.4% (annual 13-18)

Industrial and Other Property Operators

$17 Billion

13.2% (annual 13-18)

5. Competition

      

Major competitors include:[5]

 

  • Simon Property Group Inc (NYSE: SPG)
  • Scentre Group (ASX: SCG)
  • Vicinity Centres Re Ltd (ASX: VCX)

6. History

 

1996[6]     

Australian Property Network Pty Ltd commenced operations with an initial focus on real estate development and project management

 

1997  

APN Funds Management Limited was established

 

1998   

The original APN Property for Income Fund was established; the flagship property securities fund

 

2003  

APN funds under management reached $1 billion

 

2005   

APN listed on the Australian Securities Exchange as APN Property Group (ASX code: APD), combining both Australian Property Network and APN Funds Management

APN European Retail Trust floated (ASX code: AEZ)

APN Property for Income Fund No. 2 launched

APN’s first private fund, APN Development Fund No. 1 launched

 

2007  

APN’s second private fund, APN Development Fund No. 2 launched

 

2009  

APN launched the APN AREIT Fund, a property securities fund invested in Australian Real Estate Investment Trusts

 

2010  

Placement to ARA Asset Management

 

2011   

APN Funds Management Ltd appointed as Responsible Entity of the ING Real Estate Healthcare Fund. APN relaunched the fund as Generation Healthcare REIT™ (ASX code: GHC), Australia’s only listed real estate fund that invests exclusively in healthcare properties

 

2012   

APN AREIT Fund exceeds $300 million funds under management

 

2013  

APN Asian REIT Fund, a property securities fund invested in Asian Real Estate Investment Trusts launched

APN 541 St Kilda Road Fund, a direct closed-end property fund launched and was fully subscribed

Industria REIT (ASX code: IDR) initial public offering launch. IDR owns interests in a workspace focused portfolio of 18 industrial assets

 

2014   

APN launched the Newmark APN Auburn Property Fund, a fixed term fund invested in the redevelopment of a full line sub-regional retail centre

 

2015   

APN AREIT Fund exceeds $1 billion funds under management

APN launched the APN Steller Development Fund, six inner-city medium density apartment projects

APN launched the APN Coburg North Retail Fund, a fixed term fund invested in a new neighbourhood shopping centre

 

2016   

APN Property Group exceeds $2 billion funds under management

APN sells holdings in Generation Healthcare to NorthWest Healthcare Properties Real Estate Investment Trust for $58.5 million

Industria REIT acquires WesTrac Newcastle for $159 million

APN successfully launches the Convenience Retail REIT

 

2017  

Establishment and listing of Convenience Retail REIT on the ASX has been lodged with ASIC

Acquisition of 7-Eleven Dakabin

Acquisition of Durack Service Centre and market update

 

2018  

Acquisition of Puma Moree

7. Team

 

Board of Directors[7]

 

Geoff Brunsdon – Independent Chairman

Jennifer Horrigan – Independent Director

Michael Johnstone – Independent Director

Howard Brenchley – Independent Director

Michael Groth – Alternate Director for Howard Brenchley

Chantal Churchill – Company Secretary

 

Management Team

 

Chris Brockett – Fund Manager


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[8]

 

Division

Revenue ($’000)

% Change

Segment Profit ($’000)

% Change

Convenience Retail REIT

$26,438

416.6%

$15,867

435.0%

Total

$26,438

416.6%

$15,867

435.0%

9. Risk

 

Key risks[9]

 

Capital risk management

The Responsible Entity's objectives when managing the capital of the Group is to safeguard its ability to continue as a going concern, so that the Group can continue to provide returns for securityholders in accordance with the Group’s investment strategy, and to optimise the capital structure and therefore the Group’s cost of capital on a risk adjusted basis. The capital of the Group is maintained or adjusted through various methods including by adjusting the quantum of distributions paid, raising or repaying debt, issuing new securities or selling assets. The Group’s capital position is primarily monitored through its ratio of net debt to total assets (excluding cash) (“Gearing Ratio”), where a target range of between 25% - 40% has been established. As at 30 June 2018, Convenience Retail REIT’s Gearing Ratio was 31.65%.

 

Financial and risk management

The Responsible Entity is responsible for ensuring a prudent risk management culture is established for the Group. This is reflected in the adoption of a Risk Management Framework that clearly defines risk appetite and risk tolerance limits which are consistent with the Group’s investment mandate. The Group’s dedicated Fund Manager is responsible for overseeing the establishment and implementation of appropriate systems, controls, and policies to manage the Group's risk. The focus is on ensuring compliance with the approved Risk Management Framework whilst seeking to maximise security holder returns. The effective design and operation of the risk management systems, controls and policies are overseen by the Responsible Entity and its Audit, Risk and Compliance Committee. Risk management in respect to financial instruments is achieved via written policies that establish risk appetite and tolerance limits in respect to exposure to interest rate risk, credit risk, the use of derivative financial instruments and non-derivative financial instruments and the investment of excess liquidity. Compliance with these policies and exposure limits is reviewed by the Responsible Entity on a continuous basis.

 

Market risk

The Group is subject to market risk (the risk that borrowings or derivatives are repriced to different interest rate margins on refinance or renewal arising from changes in the debt markets) and Interest rate risk (the risk that a change in interest rates may have on the Group’s profitability, cashflows and/or financial position) predominantly through its borrowings, derivatives and cash exposures. The interest rates applicable to each category of financial instrument are disclosed in the applicable note to the financial statements

 

Credit risk

The Group is subject to credit risk (the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group) predominantly through its Trade and Other Receivables, Derivatives, and Cash exposures. The maximum exposure to credit risk at a reporting date is the carrying value of each financial asset as disclosed in the applicable note to the financial statements. Credit risk is managed by ensuring that at the time of entering into a contractual arrangement or acquiring a property, counterparties or tenants are of appropriate credit worthiness, provide appropriate security or other collateral and/or do not show a history of default. The Group’s treasury policy also requires that derivatives and cash transactions are limited to financial institutions that meet minimum credit rating criteria.

 

Liquidity risk

The Group is subject to liquidity risk (the risk that the Group will not be able to meet its contractual or other operating obligations). Liquidity risk is managed by continuously monitoring the forecast and actual cash flows, maintaining appropriate headroom under debt facilities and matching the maturity profiles of financial assets and liabilities. To help reduce liquidity risks in the Group:

  • has a policy which targets a minimum level of cash and cash equivalents to be maintained
  • has readily accessible standby facilities and other funding arrangements in place
  • has a debt maturity policy which targets a maximum percentage of total debt maturing in any one 12-month period; and
  •  has a loan covenant target to ensure that the Group can withstand a downward movement in valuations, a reduction in income and an increase in interest rates without breaching loan facility covenants.

References

  1. ^ Annual Report 2018, P. 30
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/2018-annual-report-1955329.pdf
  2. ^ Annual Report 2018, P 20-21
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/2018-annual-report-1955329.pdf
  3. ^ Annual Report 2018, P. 03
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/2018-annual-report-1955329.pdf
  4. ^ https://www.ibisworld.com.au/industry-trends/market-research-reports/financial-insurance-services/funds-management-services.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/rental-hiring-real-estate-services/real-estate-services.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/rental-hiring-real-estate-services/industrial-other-property-operators.html
  5. ^ https://www.marketscreener.com/CONVENIENCE-RETAIL-REIT-36764958/company/
  6. ^ http://apngroup.com.au/about-us/our-heritage/
    https://www.listcorp.com/asx/apd/apn-property/news/convenience-retail-reit-ipo-1622857.html
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/acquisition-of-puma-moree-1843311.pdf
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/acquisition-of-7-eleven-dakabin-1760493.pdf
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/acquisition-of-durack-service-centre-and-market-update-1699819.pdf
  7. ^ https://crreit.com.au/about-us/responsible-entity-board-of-directors/
    https://crreit.com.au/about-us/management/
  8. ^ Annual Report 2018, P. 30
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/2018-annual-report-1955329.pdf
  9. ^ Annual Report 2018, P. 47-48
    https://s2.listcorp.com/asx/crr/convenience-retail-reit/news/2018-annual-report-1955329.pdf